Convocation Notice of the 114th Ordinary General Meeting ... › markets › ir › irftp › data...

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Code Number: 6367

June 2, 2017

To Shareholders:

Masanori Togawa

President and CEO

Daikin Industries, Ltd.

Umeda Center Bldg.,

4-12, Nakazaki-Nishi 2-chome,

Kita-ku, Osaka

Convocation Notice of the 114th Ordinary General Meeting of Shareholders

Shareholders are hereby called to attend the 114th Ordinary General Meeting of Shareholders of

Daikin Industries, Ltd. (“Daikin” or the “Company”) to be held as indicated below.

If you are unable to attend the meeting, you may exercise your voting rights in writing (the

Voting Rights Exercise Form) or via electronic means (the Internet). Please review the

“Reference Documents for the General Meeting of Shareholders” attached hereto, and exercise

your voting rights by 5:30 p.m. on Wednesday, June 28, 2017, in accordance with “5. Guidance

on Exercising Voting Rights” on the following page.

Particulars

1. Date and Time: 10:00 a.m., Thursday, June 29, 2017

2. Venue: “Shion Hall” (4F), Hotel Hankyu International

19-19, Chayamachi, Kita-ku, Osaka, Japan

3. Meeting Agenda

Reports:

1: Business Report, Consolidated Financial Statements and the

Non-Consolidated Financial Statements for the 114th fiscal year (from April

1, 2016, to March 31, 2017)

2: Audit Reports on the Consolidated Financial Statements for the 114th fiscal

year (from April 1, 2016, to March 31, 2017) by the Independent Auditor and

the Audit & Supervisory Board

Resolution Items:

First Item: Appropriation of Surplus

Second Item: Election of Two (2) Audit & Supervisory Board Members

Third Item: Election of One (1) Substitute Audit & Supervisory Board Member

(external)

<Translation>

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4. Procedural Rules Pertaining to the Convocation

Handling of Voting Rights in the Event of Multiple Exercise

(1) In the event voting rights are exercised multiple times in writing, the last arriving vote shall be

deemed to be effective.

(2) In the event voting rights are exercised multiple times via electronic means, the last exercise

of voting rights shall be deemed to be effective.

(3) In the event voting rights are exercised in duplicate form by electronic means and in writing,

the exercise of voting rights via electronic means shall be deemed to be effective.

5. Guidance on Exercising Voting Rights

Exercising Your Voting Rights in Writing (the Voting Rights Exercise Form)

On the enclosed Voting Rights Exercise Form, please indicate either approval or disapproval of

each agenda and return the form by 5:30 p.m., Wednesday, June 28, 2017.

Exercising Your Voting Rights via Electronic Means (the Internet)

Please access the relevant website for the exercise of voting rights (http://www.evote.jp/) using a

personal computer, smartphone or a mobile phone. Please enter the login code and password

provided in the Voting Rights Exercise Form enclosed herein, and follow the instructions to

proceed with your votes by indicating either approval or disapproval of each agenda by 5:30 p.m.,

Wednesday, June 28, 2017.

Please submit the enclosed Voting Rights Exercise Form to the reception desk upon your

attendance at the meeting.

In the event that any errors are found in the Reference Documents for the General Meeting of

Shareholders, Business Report, Consolidated Financial Statements and the Non-Consolidated

Financial Statements, corrections will be posted on our website.

Our website: http://www.daikin.com/investor/shareholder/meeting/index.html

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Business Report

1. Review of Operations

(1) Progress and Results of Operations of the Company Group

Looking at the overall world economy in fiscal 2016, robust personal consumption drove the U.S. economy. Even

as the European economy maintained a moderate recovery, geopolitical risks and other factors remained to put

downward pressure on the economy. The Chinese economy slowed gradually. While the emerging economies

showed signs of improving overall, downside economic risks remained due to fluctuations in the financial markets

and foreign exchange.

Turning to the Japanese economy, a moderate recovery continued, despite signs of weakness in some areas, and

was backed by improvement in corporate earnings and an increase in exports.

In such a business environment, the Daikin Group set its New Year’s slogan for 2016 as “Let each of us

enhance our own strengths to take a big step forward,” with the aim of generating results in the first year of

“Fusion 20,” the Group’s strategic management plan that set fiscal 2020 as its target fiscal year. In particular, the

Group made efforts to secure net sales and profit by expanding sales of major air-conditioning products in each

region around the world and making group-wide efforts to reduce costs.

The Daikin Group’s net sales increased by 0.0% year over year to ¥2,043,968 million for the fiscal year under

review due to strong sales in the air conditioning business in each region, while the yen appreciated against other

currencies, including the Chinese yuan, U.S. dollar, and euro, which had a negative impact such as a decrease in

the yen-equivalent. As for profits, sales volume increased in each region and gross margin rates improved through

cost reductions, despite a factor of profit decline due to conversion to the yen-equivalent. As a result, operating

income increased by 5.9% to ¥230,769 million, ordinary income increased by 10.2% to ¥231,013 million, and

profit attributable to owners of parent increased by 12.4% to ¥153,938 million.

(2) Review of Operations by Business Segment

(i) Air-Conditioning and Refrigeration Equipment

Overall sales of the Air-Conditioning and Refrigeration Equipment segment increased by 0.4% to ¥1,835,376

million. Operating income increased by 7.7% to ¥208,749 million.

In the Japanese commercial air-conditioning equipment market, industry demand rose year over year, pushed

upward by the impact of the heat wave in Western Japan during the first half of the fiscal year and the

government’s subsidy system for replacement to high-performance energy-saving equipment. The Daikin Group

captured demand for air conditioners for stores and offices, especially those of “FIVE STAR ZEAS” and

“Eco-ZEAS” models, and net sales increased year over year.

In the Japanese residential air-conditioning equipment market, industry demand increased year over year due to

robust demand that began in the first half from the impact of the heat wave in Western Japan and continued into

the third quarter onward. The Daikin Group utilized the brand power of its room air conditioner “Urusara 7,” an

energy-saving, high value-added product, in an effort to expand sales for all models of residential air conditioners,

and net sales exceeded that of the previous fiscal year.

In Europe, while sales were strong, net sales after converting to the yen-equivalent remained flat year over year

in the region as a whole. Net sales of residential air-conditioning systems increased year over year in the local

currency owing to increased demand stemming from the heat wave in 2015 and remained strong in fiscal 2016.

Sales of commercial air-conditioning systems also remained strong, thanks to capturing replacement demand for

air-conditioning equipment in major countries despite sluggish economic growth in Europe, and net sales were up

year over year in the local currency. Despite stagnant demand in France, which is a major market, net sales of heat

pump hot water heating systems grew in Europe overall in the local currency from the previous fiscal year due to

significant sales growth in Italy and other countries.

In the Middle East and Africa, while sales were strong, net sales after converting to the yen-equivalent

decreased year over year in the region as a whole. Net sales increased year over year in the local currency, thanks

to efforts to boost orders for private-sector projects amid a series of temporary suspensions or delays, particularly

for large-scale government projects, due to prolonged stagnation of crude oil prices and growing geopolitical risks.

In Turkey, net sales increased year over year in the local currency, as a result of boosting orders for small- to

medium-scale commercial projects and strengthening sales of residential air-conditioning systems. This was

despite a series of delays in delivery, mainly for large-scale projects and others, and amid the continuing political

unrest that followed the attempted coup d’état in July.

In China, while economic growth is slowing down, the Group intensified its retail sales to capture firm personal

consumption. Net sales in the local currency rose year over year in all regions and for all products. Although net

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sales after converting to the yen-equivalent fell slightly year over year due to the depreciation of the Chinese yuan,

operating income increased year over year owing to cost reductions promoted in the production division. In the

residential-use market, the Group focused on its own specialty “PROSHOPs” and leveraged its proposal and

installation capabilities, which are its strengths, to expand sales mainly in the mid-range and high-end residential

market with the “New Life Multi Series,” residential multi-split type room air conditioners that propose a variety

of lifestyles for customers. In the commercial-use market, the Group expanded sales by carrying out model

changes to the mainstay “VRV-X” series, commercial multi-split type room air conditioners that offer enhanced

product appeal, including energy-saving performance; enhancing advertising and ‘spec-in’ for architectural firms;

and broadening the range of the target markets to extend from new construction to replacement. In the

large-building (Applied Systems) air-conditioning equipment market, the Group expanded sales by carrying out

sales activities in a wide range of projects, from large to small- to medium-scale, based on an enhanced product

lineup and reinforced after sales service business.

In Asia and Oceania, net sales after converting to the yen-equivalent remained flat year over year in the region

as a whole. Nevertheless, net sales in the local currency increased considerably year over year thanks to efforts

such as dealer development, expanded sales of differentiated energy-saving products that met local needs, and

reinforcement of the service structure, which led to the capturing of demand among the growing middle class. In

the residential air-conditioning systems, sales of inverter-type, cooling-only air conditioners with exceptional

energy-saving performance were strong, and sales grew particularly in Thailand, Vietnam, Indonesia, and India.

Sales of multi-split type room air conditioners for buildings grew due to enhanced ‘spec-in’ activities and greater

focus on dealer development.

In the Americas, net sales increased year over year in the region as a whole due to strong sales. Net sales of

residential air-conditioning systems rose year over year as a result of favorable weather in the first half and efforts

to expand the sales network. Net sales grew year over year in the light commercial air-conditioning systems for

medium-sized office buildings due to the implementation of sales strategies for each route. In the market for

Applied Systems, net sales grew year over year thanks to expanded sales of Applied Systems, mainly rooftops

equipped with inverters. This was backed by a higher level of demand than the previous fiscal year as well as

sales growth in the after sales service business.

In the marine vessels business, net sales fell year over year due to a decrease in sales for marine container

refrigeration units and air conditioners for marine vessels associated with falling demand.

(ii) Chemicals

Overall sales of the Chemicals segment decreased by 3.4% to ¥156,754 million and operating income decreased

by 11.2% year over year to ¥18,302 million. Demand for fluoropolymers was robust for semiconductor-related applications in Japan and Asia. However,

overall sales of fluoropolymers fell year over year. This was due to the strong yen, price competition in the U.S.

market from rival companies and products made in China, and intensified competition in the LAN cable market.

Fluoroelastomers were also affected significantly by foreign exchanges, and sales fell year over year, despite

robust demand in automotive fields in each region around the world.

Turning to oil and water repellents among specialty chemicals, net sales fell significantly year over year due to

sluggish sales affected by delays in switchovers to new products, among other factors, as well as the impact of

foreign exchange. Sales of anti-fouling surface coating agents used in devices, such as touch panels, increased

year over year, supported by strong demand in China. Sales of etchant for cleaning semiconductors increased year

over year due to sales growth in Japan and Asia where related demand was favorable. Overall sales of specialty

chemicals were down compared to the previous fiscal year.

As for fluorocarbon gas, overall sales of gas increased substantially year over year as a result of the growth in

sales for after sales service in the Americas.

(iii) Other Divisions

Overall sales of the “Others” segment fell by 2.9% year over year to ¥51,837 million. Operating income increased

by 6.2% year over year to ¥3,749 million.

Sales of oil hydraulic equipment for industrial machinery fell year over year due to the impact of stagnant

demand in the Japanese market. Sales of oil hydraulic equipment for construction machinery and vehicles

remained flat against the previous fiscal year due to the impact of production volume adjustments by Chinese

agricultural machinery manufacturers, despite robust sales to key customers in Japan and the U.S.

In defense systems-related products, sales of home oxygen equipment were strong, while sales of ammunitions

to the Ministry of Defense decreased, resulting in a decline in net sales compared to the previous fiscal year.

In the electronics business, net sales were on a par with the previous fiscal year, as sales especially of database

systems for design and development sectors expanded.

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On a non-consolidated basis, the Company’s net sales increased by 1.0% year over year to ¥505,569 million.

Operating income increased by 33.1% year over year to ¥50,364 million. Ordinary income increased by 63.6%

year over year to ¥141,474 million, and profit increased by 103.0% year over year to ¥124,639 million.

(3) Capital Expenditures

Adhering to the basic strategy of “Focusing Management Resources on More Profitable Areas,” the Daikin

Group’s capital expenditures were mainly allocated to Air-Conditioning and Refrigeration Equipment and

Chemicals segments, and the total amounted to ¥90,345 million.

Breakdown of capital expenditures (Millions of yen)

Business segment Name of company Amount of capital expenditure

Air-Conditioning

and Refrigeration

Equipment

Daikin Industries, Ltd. 9,064

Goodman Global Group, Inc. 31,324

Daikin Europe N.V. Group 5,185

Daikin Compressor Industries, Ltd. 5,040

Daikin Industries (Thailand) Ltd. 4,487

Daikin Applied Americas Inc.

Group

3,730

Chemicals

Daikin Industries, Ltd. 7,356

Daikin Fluorochemicals (China)

Co., Ltd.

2,492

Others Daikin Industries, Ltd. 1,046

(4) Financing Activities

The funds for the above capital expenditures were primarily raised through bank loans payable and funds on hand.

In addition, straight bonds were issued to provide for the redemption of existing bonds.

(5) Succession of Rights and Obligations Relating to Other Corporations’ Business due to Transfer of Business,

Division by Absorption or Division by Incorporation, Succession of Business from Other Companies,

Acquisition or Disposal of Other Companies’ Stock or Other Interests or Subscription Rights to Shares and

Merger and Acquisition or Division by Absorption

On April 27, 2016 (U.S. local time), the Company acquired all equity interests of Flanders Holdings LLC, an air

filter manufacturer with the largest market share in the U.S., and completed the acquisition procedures.

(6) Operating Results and the Status of Assets 111th Business Year

(from April 1, 2013,

to March 31, 2014)

112th Business Year


to March 31, 2015)

113th Business Year


to March 31, 2016)

114th Business Year


to March 31, 2017)

Net sales

(Millions of yen) 1,787,679 1,915,013 2,043,691 2,043,968

Ordinary income

(Millions of yen) 155,570 194,234 209,536 231,013

Profit attributable to owners

of parent

(Millions of yen)

92,787 119,674 136,986 153,938

Earnings per share (Yen) 318.33 410.19 469.23 526.81

Total assets

(Millions of yen) 2,011,870 2,263,989 2,191,105 2,356,148

Net assets

(Millions of yen) 823,858 1,048,311 1,037,469 1,135,609

Note: The Company and its domestic consolidated subsidiaries had formerly recognized revenue mainly on a

shipping basis. However, starting from the 112th Business Year, the Company and its domestic consolidated

subsidiaries have changed to recognize revenue on a delivery date basis under the terms and conditions of

contracts. Accordingly, figures for the 111th Business Year were adjusted retrospectively to reflect this

change in the accounting policy.

In the 111th term, the Group’s mainstay Air-Conditioning and Refrigeration Equipment segment increased both

sales and profits thanks to strong sales in Japan, China, Asia, and other regions, as well as an increase in the

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yen-equivalent resulting from the weakening yen. The impact of sales and profits of newly consolidated Goodman

Group, a company acquired in November 2012, also contributed to these increased sales and profits. In the

Chemicals segment, sales increased while profit decreased, reflecting the positive effect of the weakening yen,

coupled with a fall in prices associated with the deterioration in the balance between supply and demand against a

backdrop of increased supply. Profit attributable to owners of parent increased, due in part to a large decrease in

loss on valuation of investment securities from the previous fiscal year.

In the 112th term, the Group’s Air-Conditioning and Refrigeration Equipment segment increased both sales and

profits thanks to favorable overseas sales mainly in China, Asia, and the Americas, as well as an increase in the

yen-equivalent resulting from the weakening yen. The Chemicals segment also increased sales and profits due to

sales expansion of strongly performing products and cost reductions.

In the 113th term, the Group’s Air-Conditioning and Refrigeration Equipment segment increased both sales and

profits thanks to favorable overseas sales mainly in the Americas and Asia, as well as an increase in the

yen-equivalent resulting from the weakening yen. The Chemicals segment also increased sales and profits due to

sales expansion of semiconductor-related and other strongly performing products and foreign exchange effects, in

addition to contribution resulting from the acquisition of a European gas business.

The results of our operations during the 114th term are as described in (1) Progress and Results of Operations

of the Company Group.

(7) Issues the Group Ought to Contend With

With regard to the global economy in the future, we expect the U.S. economy to be driven by personal

consumption, and the European economy to sustain a moderate recovery trend. Although Chinese economy lacks

vigor, the emerging economies as a whole are on track for economic expansion. We expect the Japanese economy

to progress firmly due to expansion of capital expenditure and exports.

Amid this business environment, for this year (2017), we set “Integrate new power with our solid foundation to

enhance our corporate value” as the Group’s New Year’s slogan with the aim of generating results amid the

uncertain outlook in the global situation.

Specifically, we will refine our ongoing efforts to strengthen our sales and marketing capabilities, improve

product development, production, procurement, and quality capabilities, and enhance our human resources

capabilities, and promote themes aimed at further growth, while also working to reduce fixed costs. In particular,

we will pursue measures such as accelerating the creation of differentiated technologies and products at principal

bases worldwide with a focus on the Technology and Innovation Center, as we strive to expand the business with

the aim of sustainable development in the medium and long term.

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(8) Major Operations of the Company Group (as of March 31, 2017)

The Group is engaged in the manufacture and sale of the following products:

Air-Conditioning and Refrigeration Equipment

For residential use: Room air conditioners, Air purifiers, CO2 heat pump-water heaters, Far-infrared

electric heaters, Heat-pump type floor heating systems

For commercial use: Packaged air conditioning systems, Spot air conditioners, Water chilling units,

Centrifugal chillers, Screw-type chillers, Fan-coil units, Air handling units, Packaged

air conditioners for low temperatures, Air purification systems, Total heat exchangers,

Duct ventilating fans, Deodorizers, Far-infrared electric heaters, Freezers, Ammonia

water chilling units, Air filters, Industrial dust collectors, Rooftops

For marine vessels: Container refrigeration units, Marine vessel air conditioners and refrigeration units

Chemicals

Fluorocarbon gas: Refrigerants

Fluoropolymers: Ethylene tetrafluoride resins, Molten type resins, Fluoroelastomers, Fluoro paints,

Fluoro coatings

Chemicals: Semiconductor-etching products, Oil and water repellants, Mold release agents,

Surface acting agents, Fluorocarbons, Fluorinated oils, Pharmaceutical agrichemical

intermediates

Chemical engineering machinery:

Solvent deodorizing equipment, Dry air suppliers

Others

Oil Hydraulics Division

Hydraulic equipment and systems for industrial use:

Pumps, Valves, Hydraulic systems, Oil cooling units, Inverter-controlled pumps and

motors

Hydraulic equipment for construction machinery and vehicles:

Hydraulic transmissions, Valves

Centralized lubrication units and systems:

Grease pumps, Control and stack valves

Defense Systems Division

Ammunitions, components for guided missiles, and aircraft components for the

Ministry of Defense, Home oxygen equipment

Electronics Division

Process-improvement and knowledge-sharing systems for the design and

development sector, IT infrastructure management systems (network, security, and

asset management), Computer graphics solutions such as CAD systems for facility

design

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(9) Principal Bases and Employee Breakdown of the Group (as of March 31, 2017)

1) Principal bases The Company Head Office Osaka (Kita-ku)

Manufacturing

bases

Kanaoka Factory, Sakai Plant (Kita-ku, Sakai, Osaka)

Rinkai Factory, Sakai Plant (Nishi-ku, Sakai, Osaka)

Yodogawa Plant (Settsu, Osaka)

Shiga Plant (Kusatsu, Shiga)

Kashima Plant (Kamisu, Ibaraki)

Sales bases Tokyo Office (Minato-ku, Tokyo)

Overseas

offices

New York Office

Beijing Office

Guangzhou Office

Subsidiaries Japan Daikin Applied Systems Co., Ltd. (Minato-ku, Tokyo)

Daikin Airtechnology & Engineering Co., Ltd. (Sumida-ku, Tokyo)

Daikin HVAC Solution Tokyo Co., Ltd. (Shibuya-ku, Tokyo)

Daikin Hydraulic Engineering Co., Ltd. (Settsu, Osaka)

Overseas Daikin (China) Investment Co., Ltd.

Daikin Air-conditioning (Shanghai) Co., Ltd.

Daikin Device (Suzhou) Co., Ltd.

Daikin Industries (Thailand) Ltd.

Daikin Compressor Industries, Ltd. (Thailand)

Daikin Malaysia Sdn. Bhd.

Daikin Airconditioning India Pvt. Ltd.

Daikin Australia Pty., Ltd.

Daikin Europe N.V. (Belgium)

Daikin Industries Czech Republic s.r.o.

Daikin Airconditioning France S.A.S.

Daikin Isitma Ve Soğutma Sįstemlerį Sanayį ve Tįcaret A.Ş. (Turkey)

Goodman Global Group, Inc. (America)

Daikin Applied Americas Inc.

Daikin Fluorochemicals (China) Co., Ltd.

Daikin America, Inc.

2) Employee breakdown

Business segment Number of employees Increase (decrease) from the previous year

Air-Conditioning and Refrigeration Equipment 61,907 6,422

Chemicals 3,490 (34)

Others 965 (164)

Corporate 674 7

Total 67,036 6,231

Notes:

1. The number of employees is based on the number of employees at work.

2. The number of employees of the Company (the number of employees at work) is 6,891 (an increase of 21 from the previous fiscal

year).

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(10) Principal subsidiaries (as of March 31, 2017)

Name of company Share

holding Capital Principal operations

Daikin Applied Systems Co., Ltd. 100% 300 million JPY Manufacture, sale, design, and installation of air

conditioning equipment and refrigeration equipment

Daikin Airtechnology & Engineering Co.,

Ltd. 100% 275 million JPY Sale and installation of air conditioning equipment

Daikin HVAC Solution Tokyo Co., Ltd. 100% 330 million JPY Sale of air conditioning equipment

Daikin (China) Investment Co., Ltd. 100% 242,025 thousand

USD Controlling company of Chinese operations

Daikin Air-conditioning (Shanghai) Co.,

Ltd. *87.4%

82,600 thousand

USD Manufacture and sale of air conditioning equipment

Daikin Device (Suzhou) Co., Ltd. *100% 11,910 million JPY Manufacture and sale of compressors for air

conditioning equipment

Daikin Industries (Thailand) Ltd. 100% 1,300 million THB Manufacture and sale of air conditioning equipment

Daikin Compressor Industries, Ltd. 100% 3,300 million THB Manufacture and sale of compressors for air


Daikin Malaysia Sdn. Bhd. 100% 276,254 thousand

MYR Manufacture and sale of air conditioning equipment

Daikin Airconditioning India Pvt. Ltd. 100% 8,029 million INR Manufacture and sale of air conditioning equipment

Daikin Australia Pty., Ltd. 100% 10,000 thousand

AUD Manufacture and sale of air conditioning equipment

Daikin Europe N.V. 100% 155,065 thousand

EUR Manufacture and sale of air conditioning equipment

Daikin Industries Czech Republic s.r.o. *100% 1,860 million CZK Manufacture and sale of compressors for air


Daikin Airconditioning France S.A.S. *100% 1,524 thousand

EUR Sale of air conditioning equipment

Daikin Isitma Ve Soğutma Sįstemlerį

Sanayį ve Tįcaret A.Ş. *100% 150 million TRY Manufacture and sale of air conditioning equipment

Goodman Global Group, Inc. *100% — thousand USD Manufacture and sale of air conditioning equipment

Daikin Applied Americas Inc. *100% 250 thousand USD Manufacture and sale of air conditioning equipment

Daikin Fluorochemicals (China) Co., Ltd. *96.0% 161,240 thousand

USD Manufacture and sale of fluorochemicals

Daikin America, Inc. *100% 85,000 thousand

USD Manufacture and sale of fluorochemicals

Daikin Hydraulic Engineering Co., LTD. 100% 30 million JPY Manufacture and sale of oil hydraulic equipment

Note: Figures with an asterisk represent percentages including investments by subsidiaries, etc.

(11) Principal borrowings (as of March 31, 2017)

Creditors Borrowings

(Millions of yen)

Sumitomo Mitsui Banking Corporation dollar-denominated syndicated loan

(Note 1)

159,309

Sumitomo Mitsui Banking Corporation yen-denominated syndicated loan

(Note 2)

105,000

The Norinchukin Bank 50,000

Development Bank of Japan Inc. 20,000

Bank of Tokyo-Mitsubishi UFJ, Ltd 16,000

Notes:

1. Sumitomo Mitsui Banking Corporation dollar-denominated syndicated loan is co-financed by a group of banks, with Sumitomo

Mitsui Banking Corporation as the lead arranger.

2. Sumitomo Mitsui Banking Corporation yen-denominated syndicated loan is co-financed by a group of banks, with Sumitomo Mitsui

Banking Corporation as the lead arranger.

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2. Status of Shares (as of March 31, 2017)

(1) Number of Shares Authorized: 500,000 thousand shares

(2) Number of Shares Issued: 293,113 thousand shares

(3) Number of Shareholders: 24,146 (Decrease of 4,781 from the previous fiscal year)

(4) Top 10 Shareholders

Shareholders Number of shares held

(Thousands of shares)

Shareholding

(%)

The Master Trust Bank of Japan, Ltd. (Trust account) 27,100 9.3

Japan Trustee Services Bank, Ltd. (Trust account) 19,381 6.6

Sumitomo Mitsui Banking Corporation 9,000 3.1

Japan Trustee Services Bank, Ltd. (Trust account 5) 5,015 1.7

Japan Trustee Services Bank, Ltd. (Retirement Benefit Trust

Account for The Norinchukin Bank, re-entrusted by Sumitomo

Mitsui Trust Bank, Limited)

4,999 1.7

Bank of Tokyo-Mitsubishi UFJ, Ltd. 4,900 1.7

CBNY-Government of Norway 4,638 1.6

Japan Trustee Services Bank, Ltd. (Trust account 4) 4,448 1.5

Trust & Custody Services Bank, Ltd. (Securities investment trust

account) 4,051 1.4

State Street Bank and Trust Company 3,920 1.3

Notes:

1. Percentage shareholdings are rounded off to one decimal point.

2. Percentage shareholdings are calculated after deducting treasury shares (734 thousand shares).

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3. Subscription Rights to Shares

(1) Subscription rights to shares held by Directors and Audit & Supervisory Board Members at the end of

the fiscal year under review

Issue No. Exercise

price

Type and number of shares

reserved Term of exercise

Number of

subscription

rights to shares

Number of holders

No. 11

(2012) ¥2,186

Common stock

100 shares per unit of

subscription rights to

shares

July 14, 2014, to

July 13, 2018 80 1 Director

No. 12

(2013) ¥4,500

Common stock



shares

July 13, 2015, to

July 12, 2019 80 1 Director

No. 13

(2014) ¥6,715

Common stock



shares

July 15, 2016, to

July 14, 2020 130 2 Directors

No.14

(2015) ¥1

Common stock



shares

July 14, 2018, to


No. 15

(2016) ¥1

Common stock



shares

July 15, 2019, to


Note: From issue No. 14 (2015), subscription rights to shares have been granted in the form of stock compensation-type stock

options.

(2) Subscription rights to shares issued to Daikin Industries employees during the fiscal year under review

Issue No. Exercise

price

Type and number of shares

reserved Term of exercise

Number of

subscription

rights to shares

Number of holders

No. 15

(2016) ¥1

Common stock



shares

July 15, 2019, to

July 14, 2031 428

53 Daikin Industries

employees

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4. Directors and Audit & Supervisory Board Members

(1) Directors and Audit & Supervisory Board Members Position Name Responsibility or significant positions concurrently held

Chairman of the

Board and Chief

Global Group Officer

Noriyuki Inoue External Director of The Kansai Electric Power Co., Inc.

External Director of Hankyu Hanshin Holdings, Inc.

Chairman of The Daikin Foundation for Contemporary Arts

Chairman of Specified Nonprofit Corporation of Kansai Philharmonic

Orchestra

Representative

Director, President,

Member of the Board

Masanori Togawa Chairman of Internal Control Committee

Member of the HRM and Compensation Advisory Committee

Member of the Board

(external)

Chiyono Terada Chairman of the HRM and Compensation Advisory Committee

President and Representative Director of Art Corporation

Chairman and Representative Director of Art Childcare Corporation

External Director of Rock Field Co., Ltd.

Member of the Board

(external)

Tatsuo Kawada Member of the HRM and Compensation Advisory Committee

Chairman and CEO of Seiren Co., Ltd.

External Director of Hokuriku Electric Power Company

External Audit & Supervisory Board Member of Hokuhoku Financial Group,

Inc.

Chairman of Fukui Chamber of Commerce and Industry

Member of the Board

(external)

Akiji Makino Member of the HRM and Compensation Advisory Committee

Chairman, CEO and Executive Officer of Iwatani Corporation

Chairman of the Board of Iwatani Industrial Gases Corporation

Representative Director and Chairman of the Board of Central Sekiyu Gas

Corporation Limited

Representative

Director, Member of

the Board, and Senior

Executive Officer

Ken Tayano In charge of air conditioning business in Japan and Representative of China

business

Chairman of the Board and President of Daikin (China) Investment Co., Ltd.

Chairman of the Board of Daikin Fluorochemicals (China) Co., Ltd.

Member of Global Air Conditioning Committee

Member of the Board

and Senior Executive

Officer

Masatsugu Minaka Representative of air conditioning in Europe, the Middle East and Africa

President and Member of the Board of Daikin Europe N.V.

Member of Global Air Conditioning Committee

Member of the Board


Officer

Jiro Tomita In charge of Global Operations Division and manufacturing technology

Member of the Board


Officer

Takashi Matsuzaki In charge of R&D in North America (including applied solutions, commercial

& industrial refrigeration, filter and dust collection)

Member of the Board


Officer

Koichi Takahashi In charge of finance, accounting, budget and IT development, General

Manager of Finance and Accounting Division

Member of the Board

(non-resident)

Yuan Fang Regional General Manager, air conditioning business in emerging nations in

the ASEAN and Oceania of Global Operations Division

Vice Chairman and Senior Executive Officer of Daikin (China) Investment

Co., Ltd.

Chairman of the Board of Daikin Airconditioning (Hong Kong) Ltd.

Audit & Supervisory

Board Member

(external)

Ryu Yano Chairman of the Board and Representative Director of Sumitomo Forestry Co.,

Ltd.

Audit & Supervisory

Board Member

(external)

Toru Nagashima Senior Advisor of Teijin Limited

External Director of AEON Co., Ltd.

Audit & Supervisory

Board Member (full

time)

Kenji Fukunaga

Audit & Supervisory

Board Member (full

time)

Kosei Uematsu

Notes:

1. The Company reported the appointment of External Directors Chiyono Terada, Tatsuo Kawada and Akiji Makino and Audit &

Supervisory Board Members (external) Ryu Yano and Toru Nagashima to the Tokyo Stock Exchange, Inc. as Independent

Directors and Audit & Supervisory Board Members.

2. Tatsuo Kawada, Akiji Makino and Yuan Fang were elected as Members of the Board at the 113th Ordinary General Meeting of

Shareholders of the Company held on June 29, 2016, and assumed the office on the same day.

3. Toru Nagashima was elected as an Audit & Supervisory Board Member at the 113th Ordinary General Meeting of

- 13 -

Shareholders of the Company held on June 29, 2016, and assumed the office on the same day.

4. Kosuke Ikebuchi, Guntaro Kawamura and Frans Hoorelbeke resigned as Members of the Board at the conclusion of the 113th

Ordinary General Meeting of Shareholders of the Company held on June 29, 2016, due to the expiration of their terms of

office.

5. Yoshiyuki Kaneda resigned as an Audit & Supervisory Board Member at the conclusion of the 113th Ordinary General

Meeting of Shareholders of the Company held on June 29, 2016, due to the expiration of his term of office.

6. Audit & Supervisory Board Member Toru Nagashima was an External Director of Kao Corporation until March 21, 2017.

7. The following Member of the Board resigned during the fiscal year under review.

Position at time of

resignation Name

Responsibility or significant positions concurrently held

at time of resignation Date of resignation

Member of the

Board

(non-resident)

David Swift Director of Serta Simmons Bedding, LLC

Executive Business Partner of Advent International

Corporation

August 31, 2016

(2) Compensation for Directors and Audit & Supervisory Board Members

(i) Total compensation for Directors and Audit & Supervisory Board Members

Position

Number of

Directors and Audit

& Supervisory

Board Members

Total compensation

(Millions of yen)

Directors 15 1,262

Audit & Supervisory Board

Members 5 94

Total 20 1,356

Notes:

1. Total compensation includes provision for directors’ bonuses recorded in the fiscal year under review as well as the fiscal

year’s expense which is associated with subscription rights to shares (as stock options) offered to Directors (excluding

External Directors).

2. Total compensation includes the compensation for services of three Directors and one Audit & Supervisory Board Member

who retired at the conclusion of the 113th Ordinary General Meeting of Shareholders, and one Director who retired on August

31, 2016, while they were in office.

(ii) Total compensation for External Directors and Audit & Supervisory Board Members (External)

Number of

Directors and Audit

& Supervisory

Board Members

Total compensation

(Millions of yen)

Total compensation for

External Directors and Audit &

Supervisory Board Members

(external)

7 70

(iii) Computation and determination of compensation for Directors and Audit & Supervisory Board Members

The Company’s compensation system for Directors and Audit & Supervisory Board Members is designed

to enhance their motivation for improved results and contribute to the increase of the value of the Daikin

Group as a whole in accordance with the management policy on a sustained and a medium- to long-term

basis in order to meet the expectations of the shareholders. With regard to the Directors, their compensation

system is comprised of “fixed compensation” and “performance-linked compensation” that reflects the

short-term results of the company as a whole and departments, and “stock compensation-type stock

options” that reflect medium- to long-term results. As to External Directors as well as Audit & Supervisory

Board Members (external), only “fixed compensation” is provided.

The level of compensation is determined as a result of analyzing and comparing compensation data of

large Japanese manufacturing companies using research data collected by an external institution

specializing in research of compensation for Directors and Audit & Supervisory Board Members, which

are used by nearly 200 corporations listed on the First Sections of Japanese stock exchanges. Specifically,

the Company uses three indexes as basic benchmarks, which are “net sales,” “operating income” and

“ROE (return on equity).” In determining the level of compensation, we examine the relative position of

the Company’s performance position and its compensation level among comparative companies.

The performance linkage ratio used for the Company’s performance-linked compensation is set higher

than the market in order to secure sufficient incentives for the Directors and Audit & Supervisory Board

Members.

As to the assessment scaling exponent linked to the performance of the company as a whole, two

indexes of “net sales” and “operating income” have been selected as performance-linked indicators in

- 14 -

consideration of the Company’s numerical targets for the entire company’s administration of the

management figures, the indexes’ mutual relevancy and simplicity, and other company trends. With regard

to the assessment scaling exponent linked to the results of departments, we have selected each department’s

“net sales” and “operating income” as performance-linked indicators, as they serve as targets for

day-to-day business operations.

Compensations for Directors and Audit & Supervisory Board Members are determined by the

resolutions of the Board of Directors and consultations among Audit & Supervisory Board Members

respectively. The allowable total compensation for each of Directors and Audit & Supervisory Board

Members is determined at the general meeting of shareholders. These compensations are based on the

proposals made by the Compensation Advisory Committee, which is led by an External Director and

composed of five members excluding Chairman of the Board, namely, three External Directors, one

in-house Director, and one Executive Officer.

(3) External Directors and Audit & Supervisory Board Members (External)

(i) Significant Positions Concurrently Held by External Directors and Audit & Supervisory Board Members

(External)

There is no special relationship between the Company and other companies at which External Directors

and Audit & Supervisory Board Members (external) hold their concurrent significant positions as listed in

“(1) Directors and Audit & Supervisory Board Members.”

(ii) Activities by External Directors and Audit & Supervisory Board Members (External)

Position Name

Attendance record

of Board of

Directors’ meetings

Principal activities

External

Director

Chiyono

Terada

Attended 16 out of

16 meetings

(100%)

Chiyono Terada appropriately supervised the Company’s management

from an independent standpoint, based on her abundant experience and

deep insight as a corporate manager. She also proactively made

suggestions, including for management based on the viewpoints of

consumers, such as the importance of the brand of the Company and

measures to further promote achievements of female employees.

Tatsuo

Kawada

Attended 12 out of

13 meetings

(92.3%)

Tatsuo Kawada appropriately supervised the Company’s management

from an independent standpoint, based on his abundant experience and

deep insight as a corporate manager. He also proactively made

suggestions from a broad and advanced perspective, including

viewpoints concerning shifting to new business models and generation

of innovation.

Akiji

Makino

Attended 13 out of

13 meetings

(100%)

Akiji Makino appropriately supervised the Company’s management

from an independent standpoint, based on his abundant experience and

deep insight as a corporate manager. He also proactively made

suggestions from a broad and advanced perspective, including

viewpoints concerning the energy and environmental fields and service

businesses.

Position Name

Attendance record of meetings

Principal activities Board of

Directors

Audit &

Supervisory

Board Audit &

Supervisory

Board

Member

(external)

Ryu Yano Attended 12 out of

16 meetings

(75.0%)

Attended 13 out of

15 meetings

(86.6%)

Ryu Yano offered timely proposals as needed,

based on his abundant experience and deep

insight as a corporate manager, especially from a

broad and advanced perspective cultivated

through his overseas business experience.

Toru

Nagashima

Attended 13 out of

13 meetings

(100%)

Attended 10 out of

10 meetings

(100%)

Toru Nagashima offered timely proposals as

needed, based on his abundant experience and

deep insight as a corporate manager, especially

from a broad and advanced perspective cultivated

through his experience in global business

management and as a manager of a

manufacturing company.

(iii) Contract liability limitation for External Directors and Audit & Supervisory Board Members (External)

Complying with Article 427, Paragraph 1, of Japan’s Companies Act, as well as Articles 25 and 33 of the

Company’s Articles of Incorporation, all External Directors and Audit & Supervisory Board Members

- 15 -

(external) sign a contract which limits their liabilities under the Article 423, Paragraph 1, of the Companies

Act. This contract states that the maximum liability equals to the minimum liability stipulated under Article

425, Paragraph 1, of the Companies Act.

- 16 -

5. Independent Auditors (1) Name of the Independent Auditors to the Company Deloitte Touche Tohmatsu LLC (Audit Corporation)

(2) Total amount of compensation to be paid by the Company to

the Independent Auditors for the current fiscal year

¥218 million

(3) Reasons for approval of the Audit & Supervisory Board for

the amount of compensation to be paid to the Independent

Auditors

The Audit & Supervisory Board obtained necessary materials

and reports from Directors, relevant departments within the

Company, and the Independent Auditors to investigate past

activity achievements and compensation records of the

Independent Auditors together with its activity plans and the

calculation basis of the estimated compensation for the fiscal

year under review and discussed the amount of compensation to

be paid to the Independent Auditors. As a result, the Board

judged this to be appropriate in this regard, hence, pursuant to

Article 399, Paragraph 1 of the Companies Act, the Board

approved the amount of compensation to be paid to the

Independent Auditors.

(4) Non-auditing services provided to the Company by the

Independent Auditors

The Company consigns to the Independent Auditors the

following services that fall outside the scope of the audit

certification services under Article 2, Paragraph 1, of the

Certified Public Accountant Law, and pays consideration for the

services.

Advice concerning CSR (Corporate Social Responsibility)

(5) Policy on dismissal of or resolution not to re-engage the

Independent Auditors

In addition to reasons for dismissal stipulated in each item of

Article 340, Paragraph 1 of the Companies Act, the Audit &

Supervisory Board will present a movement for dismissal of or

resolution not to re-engage the Independent Auditors to the

General Meeting of Shareholders, if it is recognized that it is

difficult for the Independent Auditors to effectively perform

their duties due mostly to the occurrence of cases that damage

the eligibility or independence of the Independent Auditors.

(6) Total amount of compensation to be paid by the Company

and its subsidiaries to the Independent Auditors

¥218 million

(7) Other items Major subsidiaries of the Company engaging certified public

accounts or audit corporations other than the Company’s

Independent Auditors to conduct their audits (under Japan’s

Companies Act or Financial Instruments and Exchange Act, or

the overseas equivalents) are as follows:

Daikin (China) Investment Co., Ltd.

Daikin Air-conditioning (Shanghai) Co., Ltd.

Daikin Device (Suzhou) Co., Ltd.

Daikin Air-conditioning (Suzhou) Co., Ltd.

Daikin Fluorochemicals (China) Co., Ltd.

McQuay Central Air Conditioning (China) Co., Ltd.

6. Outline of Resolutions to Establish a System to Confirm Operational Appropriateness

<Basic Philosophy on and Status and Activities of an Internal Control System>

The Daikin Group’s system to confirm operational appropriateness based on Japan’s Companies Act and its

Enforcement Regulations is outlined below. The “Internal Control Committee” inspects and confirms the status and

activities of internal control based on the system’s various initiatives, and reports to the Board of Directors.

(Major activities in the fiscal year under review)

- The “Internal Control Committee” held three meetings.

(1) System to ensure compliance with laws and regulations by Directors and employees in execution of their

duties

We establish a compliance system that tackles and swiftly responds to compliance issues Group-wide.

Specific measures follow:

(i) In accordance with the management basic direction and code of conduct stipulated in Our Group

Philosophy (2002), Handbook for Corporate Ethics and other directives, we will be diligent in execution of

duties, use initiative, and apply these principles.

(ii) We have established a “Corporate Ethics & Risk Management Committee” made up of Directors and

department managers. This committee oversees Legal Affairs, Compliance and Intellectual Property

Department, which spearheaded thorough legal compliance Group-wide. Each department and Group

company assigns a compliance, risk management leader to ensure thorough compliance in the Company,

- 17 -

their respective departments and Group companies. We hold “Compliance, Risk Management Leader

Meeting” and “Group Compliance, Risk Management Leader Meeting” to share information, address

issues, and promote implementation of policies.

(iii) We have introduced our unique “Self-Assessment Checklist” through which each division and Group

company conducts an annual autonomous check from the standpoint of legality and risk. Using the results

of this check, the Legal Affairs, Compliance and Intellectual Property Department carries out a legal audit

on each division and Group company, and legal compliance is checked in a business audit conducted by

the Internal Auditing Department.

(iv) We have established a Helpline for Corporate Ethics. The Legal Affairs, Compliance and Intellectual

Property Department investigates reports made to this facility and forms strategies to prevent recurrence

after deliberations with the manager of the relevant division. We have established a system to promote

swift adoption of such measures Company-wide.

(v) As stated clearly in our Handbook for Corporate Ethics, we, as a business entity, stand firmly against

antisocial forces that damage social order and healthy corporate activities.

(vi) We carry out and are currently improving capacities for periodic and occasional compliance and corporate

ethics education across management and employee strata.


- We revised the Handbook for Corporate Ethics in response to recent social situations and new laws and

regulations.

- The “Corporate Ethics & Risk Management Committee” held two meetings, in which it shared

company-wide compliance issues and deliberated on measures to deal with these issues. We held the

“Compliance, Risk Management Leader Meeting” 11 times to ensure thorough compliance. Overseas, in the

Chinese and Asia & Oceania regions we held the “Regional Compliance Meeting” in which the Group

compliance, risk management leaders participated.

- Based on the “Self-Assessment Checklist,” each division and Group company conducted the self- inspection

and risk assessment. The results were deliberated by the “Corporate Ethics & Risk Management Committee.”

- In addition to the existing in-house Helpline for Corporate Ethics, we have established an external helpline.

- We conducted Directors’ training on the Antimonopoly Act and Security Export Control.

(2) System for data storage, management, and disclosure relating to execution of duties by Directors

The minutes of important committee and other meetings are retained for a storage period in accordance with

the stipulations of separate in-house regulations. Regarding disclosure of important information outside the

Company, the “Disclosure Committee” ensures completeness and appropriateness of important disclosure and

is working to improve accountability.


- We have retained the minutes of important committees and other meetings, including the Board of Directors’

Meeting, in accordance with the stipulations of in-house regulations.

- We held the “Disclosure Committee” meetings before the disclosure of quarterly results to deliberate the

appropriateness of the information provided in documents related to financial results.

(3) Rules and other systems relating to risk management

Executive Officers and the Directors responsible for operations have the authority and responsibility for

building risk management systems, which oversee the entire Group. Each of them in their own domain focuses

on product liability, quality, safety, production, sales activities and natural disasters in a cross-sectoral manner.

Regarding Company-wide risks, the Officer responsible for Corporate Ethics and Compliance supervises risk

management, and operates through the Legal Affairs, Compliance and Intellectual Property Department, in

order to specify major risks based on risk assessment, and to formulate countermeasures after deliberations

with the “Corporate Ethics and Risk Management Committee.”


- We specified a list of major risks for the fiscal year under review, comprising those related to earthquakes,

information leaks, intellectual property, overseas crises management and product liability and quality.

Subsequently, we deliberated in the “Corporate Ethics & Risk Management Committee” meeting and

implemented countermeasures to these risks.

- 18 -

(4) System to ensure efficient execution of duties by Directors

We have introduced the efficient execution framework dubbed “Executive Officer system,” which allows us to

achieve prompt decisions through substantive discussions by the reduced number of Directors. It also

accelerates the Directors’ self-directed decision-making process in each business division, geographical

location, and corporate function.

We have established the “Group Steering Meeting,” which acts as the supreme deliberating body that

manages our Group. Important management policies and strategies are determined promptly and in a timely

manner, resulting in faster problem-solving processes. We have also implemented a system which allows our

Directors and Executive Officers to appropriately and effectively execute their duties through administrative

authority and decision-making rules, based on various internal regulations, centered on the Board of Directors’

regulations, the Executive Officers Meeting regulations and collective decision-making regulations. This

initiative encourages participation, advice and guidance in management decision-making from an independent

and neutral external standpoint and provides a check function to raise appropriate and effective execution of

duties by Directors and Executive Officers. This is achieved through permanently maintaining three or more

External Directors with no conflicting interests with the Company.


- We held the Executive Officers Meeting 11 times in which the Executive Officers participated.

- We held the “Group Steering Meeting” 12 times to deliberate mainly on the key strategic themes of “Fusion

20,” the Group’s strategic management plan.

- The Board of Directors convened 16 meetings, most of which were attended by the three External Directors,

who provided appropriate comments concerning management problems.

(5) System to ensure fair business practices in the Group comprising Daikin Industries, its parent company,

and subsidiaries

To raise corporate value throughout the Group and fulfill social responsibilities, the Company and its

subsidiaries aspire to conduct that upholds Our Group Philosophy, strengthens links of direction, orders, and

communication between Group companies, and ensures fair business practices Group-wide, while carrying out

guidance, advice, and assessment. Important items determined by the Board of Directors and Executive

Officers meeting are promptly shared throughout the Group, with the exclusion of data that could be construed

as insider information. Thus through corporate behavior based on unanimous intent, we aim to cultivate an

understanding and secure fair business practices.

The departments responsible for management and support for Group companies are determined at the Head

Office, and we promote strategies for continuous cooperation in day-to-day operations. Simultaneously, we

have established “Group Management Meeting” to share information and familiarize basic strategies group by

group and to facilitate and strengthen support for solving problems and tasks of the Group companies.

We strive to handle important decisions and business execution in subsidiaries through pre-emptive

consultation and involvement and regular ascertainment of business conditions based on the stipulations of the

“Limits of Authority of Daikin Group Companies,” which was updated and further subdivided in April 2008.

To respond to the internal control reporting system (Financial Instruments and Exchange Law), the Company

began revising and upgrading its internal control systems related to financial reporting in August 2005, and

subsequently develops and establishes systems designed to ensure the appropriateness of all operational

processes throughout the Daikin Group that could affect financial reporting. In order to submit valid and

appropriate internal control reports as stipulated in Article 24.4.4 of the Financial Instruments and Exchange

Law, the Company will carry out ongoing evaluations and make required corrections to ensure that the

structures established to date are functioning properly and also continually ensure conformity with the

Financial Instruments and Exchange Law and other related laws and ordinances. In addition to its internal

control systems, in fiscal 2008 the Company established global accounting rules and is working to ensure

familiarity with these rules at a global level and make further improvements with respect to the validity and

accuracy of accounting and financial reporting.

Furthermore, it was revealed in March 2009 that the After Sales Service Division of the Company and its

subsidiary had been applying inappropriate accounting procedures. In response, the Company strengthened

accounting functions in business divisions and subsidiaries throughout the company, implemented accounting

audits by the Finance and Accounting Division, implemented special audits by the Internal Audit Department,

developed and strengthened self-monitoring in each business division, carried out training for persons in charge

of accounting, and implemented monitoring by the Finance and Accounting Division, as was the case in the

previous fiscal year. Furthermore, the Company formulated and implemented company-wide preventative

measures such as strengthening communication functions of the Legal Affairs, Compliance and Intellectual

- 19 -

Property Department to convey the importance of compliance, and established and strengthened appropriate

systems to support the preparation of reliable financial reports.


- The details of discussions and results of the Board of Directors’ Meetings and Executive Officers’ Meetings

were reported to each division and Group company to share information concerning company-wide issues.

- We made an assessment on the status and activities of our internal control systems related to financial

reporting. We made required corrections and reported the results to the Board of Directors. To prevent the

recurrence of inappropriate accounting procedures, we continuously implemented preventative measures,

including accounting audits and special audits. The operational status of these measures was reviewed by the

“Corporate Ethics & Risk Management Committee.”

(6) Ensuring effectiveness of the audit by the Audit & Supervisory Board Members

In addition to the Board of Directors’ Meeting, Audit & Supervisory Board Members attend the Executive

Officers Meetings and Company-wide technology meetings to receive reports and deliver opinions. In addition,

to ensure effectiveness of the audit, a system is in place by which the Audit & Supervisory Board is updated on

important items that influence management and performance. In that respect, Directors, Executive Officers and

employees of the Company and its Group companies report matters regarding the execution of duties that need

to be reported to the Audit & Supervisory Board Members appropriately and in a timely manner. The Company

also notifies Executive Officers and employees of the Company and its Group companies that disadvantageous

treatment on account of having made such reports is prohibited.

The Audit & Supervisory Board Members meet periodically to exchange opinions with Representative

Directors, Executive Officers and the Independent Auditors. They also attend various types of important

meetings and verify investigations and documents on related departments, and we make sure their authority

extends throughout the Group without restraint. To support this system, Group Auditors have been appointed

to each of the major Group companies, ensuring smooth flow of information. Audit & Supervisory Board

Members also periodically assemble “Group Auditors’ Meeting” in order to exchange information and make

improvements to auditing procedures. In addition, the Company bears the expenses necessary for the execution

of duties by Audit & Supervisory Board Members as they are incurred.

Auditing staff members to the Audit & Supervisory Board Members have been appointed, and Audit Office

has been established to assist with their duties. Audit Office members act on the order of the Audit &

Supervisory Board Member, and their transfer and performance assessment are conducted based on the

opinions of the Audit & Supervisory Board.


- To exchange opinions, the Audit & Supervisory Board Members had 2 meetings with the Representative

Directors, 22 with Directors and Executive Officers and 21 with the Independent Auditors. Also, the Audit &

Supervisory Board Members assembled a “Group Auditors’ Meeting” by convening Group Auditors of the

major Group companies at home and abroad.

- 20 -

Consolidated Balance Sheet

As of March 31, 2017 (Millions of yen, rounded down to the nearest million yen)

(Assets) Amounts (Liabilities) Amounts

Current assets 1,159,884 Current liabilities 626,676

Cash and deposits 344,093 Notes and accounts payable – trade 173,147

Notes and accounts receivable – trade 369,061 Short-term loans payable 57,699

Merchandise and finished goods 249,487 Current portion of bonds 10,000

Work in process 42,249 Current portion of long-term loans

payable

67,177

Raw materials and supplies 66,565 Lease obligations 1,797

Deferred tax assets 35,786 Accrued expenses 107,928

Other 60,856 Income taxes payable 27,769

Allowance for doubtful accounts (8,216) Deferred tax liabilities 23,768

Provision for directors’ bonuses 350

Non-current assets 1,196,264 Provision for product warranties 49,750

Property, plant and equipment 424,527 Other 107,286

Buildings and structures 185,002

Machinery, equipment and vehicles 137,252 Non-current liabilities 593,863

Land 37,589 Bonds payable 110,000

Leased assets 2,026 Long-term loans payable 353,292

Construction in progress 29,591 Lease obligations 9,462

Other 33,064 Deferred tax liabilities 87,993

Net defined benefit liability 11,939

Intangible assets 536,963 Other 21,174

Goodwill 330,876

Customer relationship 135,773

Other 70,313

Total liabilities 1,220,539

Investments and other assets 234,773 (Net Assets)

Investment securities 185,251 Shareholders’ equity 1,004,385

Long-term loans receivable 1,904 Capital stock 85,032

Deferred tax assets 5,048 Capital surplus 84,544

Net defined benefit asset 13,034 Retained earnings 837,968

Other 30,271 Treasury shares (3,160)

Allowance for doubtful accounts (735) Accumulated other comprehensive income 107,251

Valuation difference on available-for-sale

securities

53,041

Deferred gains or losses on hedges (119)

Foreign currency translation adjustment 61,037

Remeasurements of defined benefit plans (6,707)

Subscription rights to shares 1,079

Non-controlling interests 22,893

Total net assets 1,135,609

Total assets 2,356,148 Total liabilities and net assets 2,356,148

- 21 -

Consolidated Statement of Income

From April 1, 2016, to March 31, 2017 (Millions of yen, rounded down to the nearest million yen)

Net sales 2,043,968

Cost of sales 1,313,033

Gross profit 730,934

Selling, general and administrative expenses 500,165

Operating income 230,769

Non-operating income

Interest income 6,736

Dividend income 3,694

Foreign exchange gains 329

Other 3,986 14,746

Non-operating expenses

Interest expenses 9,910

Other 4,592 14,502

Ordinary income 231,013

Extraordinary income

Gain on sales of land 451

Gain on sales of investment securities 27

Other 49 529

Extraordinary losses

Loss on disposal of non-current assets 926

Other 6 933

Profit before income taxes 230,609

Income taxes – current 70,216

Income taxes – deferred 471 70,688

Profit 159,920

Profit attributable to non-controlling interests 5,982

Profit attributable to owners of parent 153,938

- 22 -

Consolidated Statement of Changes in Equity


Shareholders’ equity

Capital stock Capital

surplus

Retained

earnings

Treasury

shares

Total

shareholders’

equity

Balance at beginning of current

period 85,032 83,585 720,547 (4,598) 884,567

Changes of items during period

Dividends of surplus (36,518) (36,518)

Profit attributable to owners of

parent

153,938 153,938

Purchase of treasury shares (3) (3)

Disposal of treasury shares 959 1,441 2,400

Net changes of items other than

shareholders’ equity

Total changes of items during

period — 959 117,420 1,438 119,818

Balance at end of current period 85,032 84,544 837,968 (3,160) 1,004,385

Accumulated other comprehensive income

Subscription

rights to

shares

Non-

controlling

interests

Total net

assets

Valuation

difference on

available-

for-sale

securities

Deferred

gains or

losses on

hedges

Foreign

currency

translation

adjustment

Remeasure-

ments of

defined

benefit plans

Total

accumulated

other

comprehensive

income

Balance at beginning of current

period 46,319 (2,124) 93,798 (8,151) 129,842 1,118 21,942 1,037,469

Changes of items during period

Dividends of surplus (36,518)

Profit attributable to owners of

parent 153,938

Purchase of treasury shares (3)

Disposal of treasury shares 2,400

Net changes of items other than

shareholders’ equity 6,722 2,004 (32,760) 1,443 (22,590) (39) 951 (21,679)

Total changes of items during

period 6,722 2,004 (32,760) 1,443 (22,590) (39) 951 98,139

Balance at end of current period 53,041 (119) 61,037 (6,707) 107,251 1,079 22,893 1,135,609

- 23 -

Notes to the Consolidated Financial Statements

Basis for Presenting the Consolidated Financial Statements 1. Scope of Consolidation

(1) Number of consolidated subsidiaries and names of major companies among them

Number of consolidated subsidiaries: 245

Major

subsidiaries:

Omitted as they are described in “(10) Principal subsidiaries” of “1. Review of Operations”

in the Business Report.

Increase/decrease in the number of consolidated subsidiaries during the consolidated fiscal year under

review

(Newly added) Due to new establishment:

Daikin Airconditioning Egypt S.A.E., Daikin Airconditioning New Zealand Limited,

AAF (Shanghai) Co., Ltd., Daikin Applied Germany GmbH

Due to acquisition:

Flanders Holdings LLC and its 15 subsidiaries, Zanotti S.p.A. and its 7 subsidiaries,

Dinair Group AB and its 9 subsidiaries

(Excluded) Due to sale of shares:

D.S. Tech Co., Ltd.

Due to liquidation:

Nippon Muki (Suzhou) Co., Ltd., Daikin AC (Americas), Inc., Flanders EMEA B.V.,

O.Y.L. Sales & Service (Singapore) Pte Ltd.

Due to merger of consolidated subsidiaries:

STF Svenska Textilfilter AB

(2) Names of major non-consolidated subsidiaries

A major non-consolidated subsidiary: Kyoei Kasei Industries, Ltd.

Reason for exclusion of the non-consolidated subsidiaries from consolidation:

The non-consolidated subsidiaries are small in corporate size and the impact of their aggregate total assets,

net sales, profit (loss) attributable to owners of parent (amounts corresponding to the equity held by the

Company) and retained earnings (amounts corresponding to the equity held by the Company) and others on

the respective consolidated financial statements is insignificant. For this reason, these companies are

excluded from the scope of consolidation.

2. Application of the Equity Method

(1) Number of major non-consolidated subsidiaries and affiliated companies accounted for by the equity method

and names of major companies among them

Number of affiliated companies accounted for by the equity method: 18

Major

affiliated

companies:

Zhuhai Gree Daikin Device Co., Ltd.

Significant changes to the scope of application of the equity method:

(Newly added) Due to acquisition:

9193-9710 Québec Inc. and 4 other companies

(2) Names of non-consolidated subsidiaries and affiliated companies not accounted for by the equity method

Major

companies:

(Non-consolidated subsidiary)

Kyoei Kasei Industries, Ltd.

(Affiliated company)

Daimics Co., Ltd.

- 24 -

Reason for not applying the equity method to these companies:

The impact of excluding these non-consolidated subsidiaries and affiliated companies without applying the

equity method on the consolidated financial statements is insignificant in view of the profit (loss)

attributable to owners of parent (amounts corresponding to the equity held by the Company) and retained

earnings (amounts corresponding to the equity held by the Company) and others, and their intra-group

positioning is immaterial on the whole. For this reason, the equity method is not applied to these companies.

3. Summary of Significant Accounting Policies

(1) Valuation basis and method for important assets

(i) Securities:

Available-for-sale securities

Available-for-sale securities for

which the fair market values are

readily determinable:

Mainly valued at market at the end of the fiscal year.

(Unrealized gain or loss is included directly in net assets. The cost

of securities sold is determined by the moving-average method.)

Available-for-sale securities for

which the fair market values are

not readily determinable:

Mainly valued at cost determined by the moving-average method.

(ii) Derivatives: Derivative instruments are valued at fair market value.

(iii) Inventories: Mainly valued at cost determined by the gross average method (write-down of book values

due to the decline in profitability) for inventories at domestic companies, whereas mainly the

lower of cost or market determined by the gross average method is adopted for inventories at

overseas consolidated subsidiaries.

(2) Depreciation method of major depreciable assets

(i) Property, plant and equipment (excluding leased assets)

The depreciation of property, plant and equipment is computed by the straight-line method.

(ii) Intangible assets

The amortization of intangible assets is computed by the straight-line method.

Software for sales in the market is amortized by the straight-line method over the effective salable period

(3 years). Customer relationship is amortized by the straight-line method over its useful life (mainly 30

years).

The amounts of goodwill are equally amortized over 9 to 20 years on a straight-line basis.

(iii) Leased assets

Leased assets related to the finance lease transactions other than those that transfer ownership right is

amortized by the straight-line method, assuming the lease period as the useful life and no residual value.

Of finance lease transactions other than those that transfer ownership right, those of which the

commencement day of the lease transaction is prior to March 31, 2008, are accounted for as ordinary

rental transactions.

(3) Accounting standards for important reserves

(i) Allowance for doubtful accounts

The allowance for doubtful accounts is provided at an amount of possible losses from uncollectible

receivables based on the actual loan loss ratio from bad debt for ordinary receivables and on the estimated

recoverability for specific doubtful receivables.

(ii) Provision for directors’ bonuses

The provision for directors’ bonuses is provided at an amount based on the amount estimated to be paid at

the end of the fiscal year under review.

(iii) Provision for product warranties

The provision for product warranties is provided for possible free repair costs of sold products at an

amount considered necessary based on the past track record plus projected future guarantees.

- 25 -

(4) Other important matters as the basis for presenting the consolidated financial statements

(i) Important hedge accounting

(a) Hedge accounting method

The Group adopts the deferral hedge accounting method, in principle. Certain foreign exchange

contracts are subject to appropriation if they satisfy the requirements of appropriation treatment. For

interest rate swaps, the preferential treatment is applied if the swaps satisfy the requirements.

(b) Hedging instruments and hedged items

For the purpose of hedging exposure to exchange rate fluctuation risk, the Group adopts foreign

exchange contracts, currency swaps and currency options as hedging instruments, and financial assets

and liabilities denominated in foreign currencies such as monetary receivables and payables as hedged

items. Moreover, as for interest rate fluctuation risk, the Group adopts interest rate swaps and interest

rate options as hedging instruments, and financial liabilities such as bank loans as hedged items.

(c) Hedging policy and method of assessing hedging effectiveness

The Group’s risk management focuses on the effective utilization of derivative transactions to avoid

the exposure of assets and liabilities to exchange rate fluctuation risk and reduce interest payments for

the purpose of circumventing an unexpectedly huge loss. A regular test is conducted to verify the

effectiveness of the hedging function of the derivatives held by the Group. An additional derivative of

any kind is subject to the above hedging function test and prior assessment before starting such

derivative transactions. The hedging effectiveness is judged through the comparison of the cumulative

total of the market fluctuations or the cash flow fluctuations of the hedged item with the respective

counterparts of the hedging instrument. Financial techniques such as regression analysis are used if

necessary. A similar check system is adopted by the consolidated subsidiaries with regard to the

assessment of hedging effectiveness.

(ii) Accounting policy for retirement benefits

(a) Method of attributing expected benefit to periods of service

The method of attributing expected benefit to the current period in calculation of projected benefit

obligation is based on the benefit formula.

(b) Method of recognizing actuarial gains/losses and prior service costs

Actuarial gains and losses are amortized by the straight-line method over a certain period (mainly 10

years), which is within the average remaining service period of employees at the time of recognition.

Prior service costs are amortized by the straight-line method over a certain period (mainly 10 years),

which is within the average remaining service period of employees at the time of recognition.

(iii) Accounting for consumption tax

Consumption tax and local consumption tax are excluded from each transaction amount.

Change in Presentation Method (Consolidated Statement of Income)

From the consolidated fiscal year under review, “subsidy income” in non-operating income, which was separately

presented in the prior consolidated fiscal year, has been included in “other” of non-operating income, as the

quantitative impact on the financial statements has become less significant.

Additional Information Effective from the fiscal year ended March 31, 2017, the Company has applied the Revised Implementation Guidance

on Recoverability of Deferred Tax Assets (ASBJ Guidance No. 26, March 28, 2016).

Notes to the Consolidated Balance Sheet

1. Assets pledged as collateral and corresponding secured debt (Millions of yen)

(1) Time deposits 193

There is no debt secured by the above collateral.

(Millions of yen)

(2) Notes receivable 399

There is no debt secured by the above collateral.

- 26 -

(3) Assets pledged as collateral for loans payable advanced to investee companies from financial institutions

(Millions of yen)

Investment securities 800

(Millions of yen)

2. Accumulated depreciation of property, plant and equipment 665,063

(Millions of yen)

3. Amount of notes endorsed 4,117

(Millions of yen)

4. Recourse obligation associated with contingent liabilities 221

Notes to the Consolidated Statement of Changes in Equity 1. Type and total number of shares issued as of March 31, 2017

Common shares: 293,113,973 shares

2. Dividends

(1) Dividend amounts paid

Resolution Type of shares

Total amount of

dividends

(Millions of yen)

Dividend per

share

(Yen)

Record date Effective date

Ordinary General

Meeting of

Shareholders held

on June 29, 2016

Common shares 18,982 65 March 31, 2016 June 30, 2016

Board of Directors’

meeting held on

November 8, 2016

Common shares 17,535 60 September 30, 2016 December 2, 2016

(2) Of the dividends for which the record date belongs to the fiscal year ended March 31, 2017, those for which the

effective date of the dividends will be in the fiscal year ending March 31, 2018

Planned date of

resolution

Type of

shares

Source of

funds for

dividends

Total

amount of

dividends

(Millions of

yen)

Dividend

per share

(Yen)

Record date Effective date

Ordinary General

Meeting of

Shareholders to be

held on June 29,

2017

Common

shares

Retained

earnings 20,466 70 March 31, 2017 June 30, 2017

3. Type and number of shares subject to subscription rights to shares at March 31, 2017 (excluding those for which

the first day of the exercise period has not yet arrived)

Common shares: 144,000 shares

Notes to Financial Instruments 1. Status of Financial Instruments

(1) Policy on treatment of financial instruments

The Group raises necessary funds (mainly, bank loans and bond issuance) in the light of business capital

expenditure projects. For short-term working capital, funds are raised from bank loans and commercial papers,

and temporary surplus funds are being managed with secure financial funds. We use derivatives trading for actual

demand only, and do not use it for speculation purposes, in order to mitigate the risks described below. The Group

does not use any special type of derivatives trading (leveraged trading) that involves high price volatility.

(2) Details of financial instruments, their risks, and risk management systems

Operating receivables, namely, notes and accounts receivable – trade are exposed to customer credit risk. In order

to deal with these risks, in accordance with the credit management policy and global accounting rules, we have a

system to check the credit status of our key business partners as well as a system to control due dates and balances

- 27 -

of each business partner.

For notes and accounts payable – trade, payment due dates are usually within one year.

The currency exchange risk of the debts and credits in foreign currencies which arise from global business

operations is hedged by using forward exchange contracts, currency swaps, etc., in principle against the net

amount of the debts and credits in the same currency. Also, depending on the foreign exchange market conditions,

similar derivatives transactions are used in respect of the foreign currency debts and credits, which are expected to

incur from the anticipated transactions.

Investment securities are mainly shares in the companies, which are business partners for the purpose of

business alliances or capital tie-ups. While investment securities are exposed to market value fluctuation risks, we

review the market value and the financial conditions of the issuers (business partners) on a regular basis and

continuously review the status of the shareholdings by taking into account relationships with business partners.

Short-term loans payable and commercial papers are mainly used as working capital. Long-term loans payable

and bonds payable are used mainly for the purpose of procuring funds necessary for capital expenditures. While

the operating debts, loans payable and bonds payable are exposed to liquidity risk, the Finance and Accounting

Division manages such risk by timely planning and updating the cash management planning and is prepared for

liquidity risk by setting up a commitment credit line so that funds settlement may be done if there is any sudden

change in the fund raising markets. Part of the long-term loans payable on a floating rate basis, which is exposed

to interest rate fluctuation risks, is hedged by the use of derivative transactions such as interest rate swaps, etc.

Derivative transactions are transactions which include forward exchange contracts, etc., for the purpose of

hedging exchange fluctuation risks of the debts and credits denominated in foreign currencies, interest rates swap

transactions, etc., for the purpose of hedging interest fluctuation risks of loans, and commodity futures

transactions for the purpose of hedging the market price fluctuation risks of the raw materials. Derivative

transactions are entered into in accordance with Regulation of Derivatives Trading, which set out the authority for

transactions, the maximum amount, etc. Derivative transactions are conducted by the Finance and Accounting

Division and monitored daily by the Corporate Planning Department for internal checking and are regularly

reported to the Company’s Board of Directors. A similar management system is also adopted by consolidated

subsidiaries. Derivative transactions are entered into only with financial institutions with high credit ratings in

order to mitigate credit risk.

With respect to derivative transactions, which satisfy the hedge accounting criteria, hedge accounting is applied.

Hedging instruments and hedged items related to hedge accounting, hedge policies and methods for evaluating

effectiveness of hedges are set forth in “Important hedge accounting method” under “Basis for Presenting the

Consolidated Financial Statements.”

(3) Supplementary explanation of matters concerning fair market value, etc., of financial instruments

Methods for determining fair market value of financial instruments include pricing based on market price, and

where there is no market price, a price which is calculated using reasonable methods. Variable factors are

considered in calculating the pricing, and therefore the pricing may fluctuate if different assumptions are applied.

2. Matters concerning fair market value, etc., of financial instruments

The prices recorded in the consolidated balance sheet, fair market value and the difference between those as of

March 31, 2017 (consolidated financial closing date for the fiscal year under review), are as follows. Instruments

for which it is deemed extremely difficult to ascertain the fair market value are not included in the below chart (see

Note 2).

- 28 -

(Millions of yen)

Amount recorded

in the consolidated

balance sheet

Fair market value Difference

(1) Cash and deposits 344,093 344,093 —

(2) Notes and accounts receivable – trade 369,061 369,061 —

(3) Investment securities

Available-for-sale securities 169,107 169,107 —

Total assets 882,263 882,263 —

(1) Notes and accounts payable – trade 173,147 173,147 —

(2) Short-term loans payable 57,699 57,699 —

(3) Income taxes payable 27,769 27,769 —

(4) Bonds payable 120,000 123,868 3,868

(5) Long-term loans payable 420,470 422,762 2,292

Total liabilities 799,086 805,247 6,160

Derivative Transactions (*) (1,362) (1,362) —

(*) Net credits/debts arising from derivative transactions are shown at net value, and items that total to a net debt are

shown in parentheses.

Note 1: Method for calculating fair market value of financial instruments

Assets

(1) Cash and deposits

All deposits are liquid in the short term, and fair market value is roughly equal to book value. The fair market

value is therefore stated at book value.

(2) Notes and accounts receivable – trade

These instruments are settled in a short term, and fair market value is roughly equal to book value. The fair

market value is therefore stated at book value.

(3) Investment securities

The fair market value of shares is stated at the price on the relevant stock exchange, and the fair market value of

bonds is stated at the present value of the total of principal and interest discounted by an interest rate adjusted for

the remaining period to bond maturity and credit risk.

Liabilities

(1) Notes and accounts payable – trade, (2) Short-term loans payable, and (3) Income taxes payable

These instruments are settled in a short term, and fair market value is roughly equal to book value. The fair

market value is therefore stated at book value.

(4) Bonds payable

The fair market value of bonds payable issued by the Company is stated at the market price.

(5) Long-term loans payable

The fair market value of long-term loans payable has been determined by discounting the total of principal and

interest by the interest rate on similar new loans payable. For loans payable with variable interest, the fair market

value of long-term loans payable subject to special treatment such as interest rate swaps has been determined by

discounting the total of principal and interest stated in association with the interest rate swap by an interest rate

reasonably estimated from that applied to similar loans payable.

Derivatives transactions

The fair market value of currency-related instruments is stated at the futures exchange market value or the price from

the supplying financial institution. The fair market value of interest-related instruments is stated at the price presented

by the transacting financial institution. The fair market value of commodity is stated at the market value of futures

listed on the future exchange. Interest rate swaps subject to special treatment are stated in association with hedged

long-term loans payable and their fair market value is therefore included in the fair market value of the relevant

long-term loans payable.

Note 2: Unlisted shares (amount recorded in the consolidated balance sheet was ¥9,413 million), investments, etc., in

investment funds (amount recorded in the consolidated balance sheet was ¥684 million) and shares of

non-consolidated subsidiaries and affiliated companies (amount recorded in the consolidated balance sheet

was ¥6,045 million) are not included in “(3) Investment securities,” as it is deemed to be extremely difficult

to ascertain the fair market value as those instruments have no market prices, and it is not possible to estimate

their future cash flows.

- 29 -

Per Share Information Net assets per share: ¥3,802.10

Earnings per share: ¥526.81

Tax Effect Accounting 1. Breakdown of deferred tax assets and deferred tax liabilities by major cause

(Millions of yen)

Deferred tax assets:

Provision for product warranties 14,696

Tax loss carryforwards 9,907

Unrealized profit of inventories 9,444

Investment securities 6,911

Deferred revenue 6,484

Software and other assets 6,012

Inventories 5,106

Provision for bonuses 3,973

Net defined benefit liabilities 2,487

Allowance for doubtful accounts 1,746

Foreign income tax credit 184

Other 20,614

Subtotal of deferred tax assets 87,569

Less valuation allowance (16,728)

Total deferred tax assets 70,841

Deferred tax liabilities:

Intangible assets (69,573)

Undistributed earnings of consolidated subsidiaries (33,482)

Valuation difference on available-for-sale securities (16,727)

Net defined benefit assets (4,215)

Reserve for advanced depreciation of non-current assets (1,374)

Other (16,396)

Total deferred tax liabilities (141,770)

Net deferred tax assets (liabilities) (70,928)

2. Revision of the amounts of deferred tax assets and deferred tax liabilities due to the change in corporate

income tax rate

Following the enactment in the Diet of the “Act for Partial Revision of the Act for Partial Revision of the

Consumption Tax Act for the Fundamental Reform of the Taxation System to Achieve a Stable Source of

Revenue for Social Security” and the “Act for Partial Revision of the Act for Partial Revision of the Local

Tax Act and Local Allocation Tax Act for the Fundamental Reform of the Taxation System to Achieve a

Stable Source of Revenue for Social Security,” on November 18, 2016, the statutory effective income tax

rate used in the calculation of deferred tax assets and deferred tax liabilities for the consolidated fiscal year

under review has been changed from the figures used for the previous consolidated fiscal year.

As a result, deferred tax liabilities (net of deferred tax assets) and income taxes – deferred recorded in the

consolidated fiscal year under review were revised. However, the resulting impact is immaterial.

- 30 -

Retirement Benefits 1. Outline of the retirement benefit plans adopted

The Company and its domestic consolidated subsidiaries have a defined benefit corporate pension plan and a

retirement lump-sum plan as defined-benefit plans, as well as a defined contribution pension plan. Several

overseas consolidated subsidiaries have either defined benefit or defined contribution pension plans. Net defined

benefit liabilities and retirement benefit expenses for certain of the retirement lump-sum plans held by the

Company and its domestic consolidated subsidiaries are calculated using the simplified method.

2. Defined benefit plan

(1) Adjustment table for the beginning and ending balances for projected benefit obligation

(excluding the benefit plan applying the simplified method) (Millions of yen)

Beginning balance for projected benefit obligation 95,394

Service cost 4,750

Interest cost 1,163

Actuarial losses (gains) arising during the period 4,647

Amount of retirement benefits paid (3,751)

Effect of changes in scope of consolidation 164

Foreign currency translation adjustment (3,204)

Other (5)

Ending balance for projected benefit obligation 99,159

(2) Adjustment table for the beginning and ending balances for plan assets

(excluding the benefit plan applying the simplified method) (Millions of yen)

Beginning balance for plan assets 98,679

Expected return on plan assets 3,269

Actuarial losses (gains) arising during the period 4,257

Employer contributions 3,067


Effect of changes in scope of consolidation (231)

Foreign currency translation adjustment (2,725)

Other (17)

Ending balance for plan assets 102,957

(3) Adjustment table for the beginning and ending balances for net defined benefit liabilities under the simplified

method (Millions of yen)

Beginning balance for net defined benefit liabilities 2,726

Retirement benefit expenses 1,195


Ending balance for net defined benefit liabilities 2,702

(4) Adjustment table for the ending balances for projected benefit obligation and plan assets, and net defined benefit

liabilities and assets recorded on the consolidated balance sheet (Millions of yen)

Retirement benefit obligation (funded) (95,867)

Plan assets 102,957

7,089

Retirement benefit obligation (unfunded) (5,994)

Net amount for assets and liabilities recorded on the

consolidated balance sheet 1,095

Net defined benefit liabilities (11,939)

Net defined benefit assets 13,034

Net amount for assets and liabilities recorded on the

consolidated balance sheet 1,095

Note: Including the benefit plan applying the simplified method

- 31 -

(5) Amount of retirement benefit expenses and its breakdown (Millions of yen)

Service cost 4,750

Interest cost 1,163

Expected return on plan assets (3,269)

Recognized actuarial losses (gains) during the period 2,038

Amortization of prior service cost during the period (144)

Retirement benefit expenses calculated by the simplified

method 1,195

Other (3)

Total 5,732

(6) Remeasurements of defined benefit plans

Breakdown of the items (before adoption of tax-effect accounting) recorded in remeasurements of defined benefit

plans is as follows: (Millions of yen)

Unrecognized prior service cost (680)

Unrecognized actuarial gain 9,617

Total 8,937

(7) Plan assets

(i) Breakdown of plan assets

Percentages of major asset classes to total plan assets are as follows:

Domestic bonds 6%

Domestic equities 8%

International bonds 22%

International equities 20%

Insurance assets (general account) 17%

Cash and deposits 1%

Alternative investments 26%

Other 0%

Total 100%

(Change in presentation method)

From the consolidated fiscal year under review, investment in hedge funds, etc., which was included in “other” in the

prior consolidated fiscal year, has been separately presented as “alternative investments” in order to enhance the

clarity of disclosure. “Real estate,” which was separately presented, has also been included in “alternative

investments.”

(ii) Method for setting the expected long-term rate of return on plan assets

Current and expected allocation of plan assets and long-term rate of return on various assets composing the plan

assets are taken into account in determining the expected long-term rate of return on plan assets.

(8) Basis for computation used in actuarial calculation

Basis for computation used in major actuarial calculation

Discount rate mainly 0.3%

Expected long-term rate of return on plan assets mainly 2.5%

Expected rate of salary increases mainly 3.5%

3. Defined contribution plan

Amount of contribution required to defined contribution plan paid by the Company and its consolidated

subsidiaries is ¥4,965 million.

- 32 -

Business Combinations Business combination through acquisition

(1) Summary of business combination

(i) Summary of the acquired company Name of the acquired company: Flanders Holdings LLC

Description of business: Manufacture and sale of air filters and other related products

(ii) Reasons for the acquisition

With this acquisition, the business of Flanders Holdings LLC (hereinafter, “Flanders”) was integrated into

American Air Filter Company, Inc. (hereinafter, “AAF”), a U.S. subsidiary of the Company, and enabling

AAF to leverage its global sales network to market the cleanroom equipment and high-end air filter

products that are the strengths of Flanders. In addition to making AAF the leading manufacturer in the

United States, which is reportedly the largest air filter market in the world, this merger also positioned AAF

as a leading company in the global market.

(iii) Date of business combination: April 27, 2016

(iv) Legal form of business combination: Acquisition of equity interest for cash considerations

(v) Acquired equity interest ratio: 100%

(2) Period included in the consolidated statements of income for the consolidated accumulated period in terms of

financial results of the acquired company

From April 27, 2016, to March 31, 2017

- 33 -

Non-Consolidated Balance Sheet

As of March 31, 2017 (Millions of yen, rounded down to the nearest million yen)

(Assets) Amounts (Liabilities) Amounts

Current assets 306,832 Current liabilities 272,834

Cash and deposits 10,243 Notes payable – trade 4,371

Notes receivable – trade 1,123 Accounts payable – trade 34,839

Accounts receivable – trade 90,326 Short-term loans payable 49,759

Merchandise and finished goods 31,750 Current portion of bonds 10,000

Work in process 26,755 Current portion of long-term loans

payable

66,982

Raw materials and supplies 4,626 Lease obligations 899

Prepaid expenses 1,585 Accounts payable – other 2,650

Deferred tax assets 7,011 Accrued expenses 25,719

Short-term loans receivable 90,238 Income taxes payable 12,478

Accounts receivable – other 23,014 Advances received 642

Other 20,159 Deposits received 47,239

Allowance for doubtful accounts (2) Provision for directors’ bonuses 350


Notes payable – facilities 1,374

Accounts payable – facilities 8,753

Non-current assets 1,057,113 Non-current liabilities 482,816

Property, plant and equipment 133,672 Bonds payable 110,000

Buildings 55,289 Long-term loans payable 352,760

Structures 6,063 Lease obligations 743

Machinery and equipment 35,874 Long-term accounts payable – other 404

Vehicles 70 Provision for retirement benefits 1,979

Tools, furniture and fixtures 9,184 Deferred tax liabilities 15,617

Land 20,262 Other 1,311

Leased assets 1,534 Total liabilities 755,651

Construction in progress 5,392 (Net assets)

Intangible assets 2,544 Shareholders’ equity 555,488

Patent right, etc 2,544 Capital stock 85,032

Investments and other assets 920,896 Capital surplus 84,586

Investment securities 177,730 Legal capital surplus 82,977

Shares of subsidiaries and associates 496,853 Other capital surplus 1,609

Investments in capital of subsidiaries and

associates

100,733 Proceeds from disposal of treasury

shares

1,609

Long-term loans receivable from

subsidiaries and associates

123,753 Retained earnings 389,023

Long-term loans receivable 242 Legal retained earnings 6,066

Long-term prepaid expenses 890 Other retained earnings 382,956

Prepaid pension cost 12,559 Reserve for advanced depreciation of

non-current assets

3,997

Guarantee deposits 2,842 General reserve 146,210

Other 5,835 Retained earnings brought forward 232,749

Allowance for doubtful accounts (544) Treasury shares (3,153)

Valuation and translation adjustments 51,726

Valuation difference on

available-for-sale securities

52,605

Deferred gains or losses on hedges (878)

Subscription rights to shares 1,079

Total net assets 608,294

Total assets 1,363,946 Total liabilities and net assets 1,363,946

- 34 -

Non-Consolidated Statement of Income


Net sales 505,569

Cost of sales 339,892

Gross profit 165,676

Selling, general and administrative expenses 115,311

Operating income 50,364

Non-operating income

Interest income 3,494

Interest on securities 20

Dividend income 96,757

Other 535 100,808

Non-operating expenses

Interest expenses 5,874

Interest on bonds 1,475

Sales discounts 280

Foreign exchange losses 1,007

Other 1,060 9,698

Ordinary income 141,474

Extraordinary income

Gain on sales of land 451

Gain on sales of shares of subsidiaries and

associates 950 1,401

Extraordinary losses

Loss on disposal of non-current assets 586

Other 3 589

Profit before income taxes 142,286

Income taxes – current 19,794

Income taxes – deferred (2,147) 17,647

Profit 124,639

- 35 -

Non-Consolidated Statement of Changes in Equity From April 1, 2016, to March 31, 2017

(Millions of yen, rounded down to the nearest million yen)

Shareholders’ equity

Capital

stock

Capital surplus Retained earnings

Legal

capital

surplus

Other

capital

surplus

Total

capital

surplus

Legal

retained

earnings

Other retained earnings

Total

retained

earnings

Proceeds

from

disposal

of

treasury

shares

Reserve for

advanced

depreciation

of

non-current

assets

Reserve

for

special

account

for

advanced

deprecia-

tion of

non-

current

assets

General

reserve

Retained

earnings

brought

forward

Balance at beginning of

current period 85,032 82,977 649 83,626 6,066 3,887 166 146,210 144,571 300,901

Changes of items during

period


Reversal of reserve for

advanced depreciation of

non-current assets

(56) 56 ―

Provision of reserve for


non-current assets

166 (166) ―


special account for


non-current assets

(166) 166 ―

Profit 124,639 124,639

Purchase of treasury shares

Disposal of treasury shares 959 959

Net changes of items other

than shareholders’ equity

Total changes of items

during period ― ― 959 959 ― 109 (166) ― 88,177 88,121

Balance at end of current

period 85,032 82,977 1,609 84,586 6,066 3,997 ― 146,210 232,749 389,023

- 36 -

Shareholders’ equity Valuation and translation adjustments

Subscription

rights to

shares

Total net

assets Treasury

shares

Total

shareholders’

equity

Valuation

difference on

available-for-

sale securities

Deferred

gains or

losses on

hedges

Total valuation

and translation

adjustments

Balance at beginning of

current period (4,592) 464,969 45,970 (1,360) 44,609 1,118 510,697

Changes of items during

period




non-current assets

― ―

Provision of reserve for


non-current assets

― ―


special account for


non-current assets

― ―

Profit 124,639 124,639

Purchase of treasury shares (2) (2) (2)

Disposal of treasury shares 1,441 2,400 2,400

Net changes of items other

than shareholders’ equity 6,634 482 7,117 (39) 7,078

Total changes of items

during period 1,438 90,519 6,634 482 7,117 (39) 97,597

Balance at end of current

period (3,153) 555,488 52,605 (878) 51,726 1,079 608,294

- 37 -

Notes to the Non-Consolidated Financial Statements

Significant Accounting Policies 1. Valuation basis and method for assets

(1) Securities

Shares of subsidiaries and affiliated companies: Valued at cost determined by the moving-average method.

Available-for-sale securities

Available-for-sale

securities for which the

fair market values are


Valued at market as of the balance sheet date.

(Unrealized gain or loss is included directly in net assets. The cost of

securities sold is determined by the moving-average method.)

Available-for-sale

securities for which the

fair market values are not


Valued at cost determined by the moving-average method.

(2) Derivatives: Derivative instruments are valued at fair market value.

(3) Inventories: Valued at cost determined by the gross average method (write-down of book values due to the

decline in profitability).

2. Depreciation method of non-current assets:

(1) Property, plant and equipment (excluding leased assets)

The depreciation of property, plant and equipment at the Company is computed by the straight-line method.

(2) Intangible assets

The amortization of intangible assets is computed by the straight-line method.

Software for sales in the market is amortized by the straight-line method over the effective salable period (3

years).

(3) Leased assets

Leased assets related to the finance lease transactions other than those that transfer ownership right is

amortized by the straight-line method, assuming the lease period as the useful life and no residual value.

3. Accounting standards for reserves

(1) Allowance for doubtful accounts

The allowance for doubtful accounts is provided at an amount of possible losses from uncollectible

receivables based on the actual loan loss ratio from bad debt for ordinary receivables and on the estimated

recoverability for specific doubtful receivables.

(2) Provision for directors’ bonuses

The provision for directors’ bonuses is provided at an amount based on the amount estimated to be paid at the

end of the fiscal year under review.

(3) Provision for product warranties

The provision for product warranties is provided for possible free repair costs of sold products at an amount

considered necessary based on the past track record plus projected future guarantees.

(4) Provision for retirement benefits

• The provision for retirement benefits is provided for possible payment of employees’ post-retirement benefits

at the amount to be accrued at the balance sheet date and is calculated based on projected benefit obligations

and the fair value of plan assets at the balance sheet date. The provision for retirement benefits and the

retirement benefit expenses are calculated and amortized as follows:

(i) Method of attributing expected benefit to periods of service

The method of attributing expected benefit to the current period in calculation of projected benefit

obligation is based on benefit formula.

(ii) Method of recognizing actuarial gains/losses and prior service costs

Actuarial gains and losses are amortized by the straight-line method over a certain period (mainly 10

- 38 -

years), which is within the average remaining service period of employees at the time of recognition.

Prior service costs are amortized by the straight-line method over a certain period (mainly 10 years),

which is within the average remaining service period of employees at the time of recognition.

• Unrecognized actuarial gains or losses and unrecognized past service costs on the non-consolidated balance

sheet are treated differently from on the consolidated balance sheet.

4. Other important matters as the basis for presenting the non-consolidated financial statements

(1) Hedge accounting

(i) Hedge accounting method

The Company adopts the deferral hedge accounting method, in principle. Certain foreign exchange

contracts are subject to appropriation if they satisfy the requirements of appropriation treatment. For

interest rate swaps, the preferential treatment is applied if the swaps satisfy the requirements.

(ii) Hedging instruments and hedged items

For the purpose of hedging exposure to exchange rate fluctuation risk, the Company adopts foreign

exchange contracts, currency swaps and currency options as hedging instruments, and financial assets and

liabilities denominated in foreign currencies such as monetary receivables and payables as hedged items.

Moreover, as for interest rate fluctuation risk, the Company adopts interest rate swaps and interest rate

options as hedging instruments, and financial liabilities such as bank loans as hedged items.

(iii) Hedging policy and method of assessing hedging effectiveness

The Company’s risk management focuses on the effective utilization of derivative transactions to avoid

the exposure of assets and liabilities to exchange rate fluctuation risk and reduce interest payments for the

purpose of circumventing an unexpectedly huge loss. The Company has formulated the Risk Management

Rules, which outline a risk management method and other details such as a cap on the amount of funds

that can be used for derivative transactions. Derivative transactions are routinely conducted by the

Finance and Accounting Division and routine risk management operations by the Corporate Planning

Department based on the Rules, and the status of derivative trading is regularly reported to the Company’s

Board of Directors. A regular test is conducted to verify the effectiveness of the hedging function of the

derivatives held by the Company. An additional derivative of any kind is subject to the above hedging

function test and prior assessment before starting such derivative transactions. The hedging effectiveness

is judged through the comparison of the cumulative total of the market fluctuations or the cash flow

fluctuations of the hedged item with the respective counterparts of the hedging instrument. Financial

techniques such as regression analysis are used if necessary.

(2) Accounting for the consumption tax

Consumption tax and local consumption tax are excluded from each transaction amount.

Change in Presentation Method

(Non-Consolidated Statement of Income)

From the fiscal year under review, “interest on commercial papers” in non-operating expenses, which was separately

presented in the prior fiscal year, has been included in “other” of non-operating expenses, as the quantitative impact

on the financial statements has become less significant.

Additional Information Effective from the fiscal year ended March 31, 2017, the Company has applied the Revised Implementation Guidance

on Recoverability of Deferred Tax Assets (ASBJ Guidance No. 26, March 28, 2016).

Notes to the Non-Consolidated Balance Sheet

1. Assets pledged as collateral and corresponding secured debt

Assets pledged as collateral for loans payable advanced to investee companies from financial institutions (Millions of yen)

Investment securities 800

(Millions of yen)

2. Accumulated depreciation of property, plant and equipment 345,031

- 39 -

3. Liabilities on guarantee

(1) Guarantees

Guarantees on the bank loans of the following affiliated companies payable to financial institutions (Millions of yen)

Goodman Global, Inc. 11,767

AAF S.A. 1,153

AAF International Air Filtration Systems LLC 686

Stejasa Agregados Industriales S.A. 614

Daikin Refrigerants Europe GmbH 175

Four (4) other companies 187

Total 14,585

(2) Commitments to guarantee

Commitments to guarantee on the bank loans of the following affiliated companies payable to financial

institutions (Millions of yen)

AAF-McQuay UK Limited 6,456

AAF-Lufttechnik GmbH 5,869

Daikin America, Inc. 4,812

Daikin Isitma Ve Soğutma Sįstemlerį Sanayį ve Tįcaret A.Ş. 4,147

AAF-International B.V. 3,773

Thirteen (13) other companies 13,911

Total 38,971

(3) Acknowledgements of loans payable

Acknowledgments of loans payable are deposited for bank loans of the following affiliated companies payable

to financial institutions (Millions of yen)

Daikin Airconditioning (Singapore) PTE Ltd. 309

(Millions of yen)

4. Recourse obligation associated with contingent liabilities 71

5. Monetary receivables/payables from/to affiliated companies (excluding those separately presented under the

respective account titles) (Millions of yen)

Short-term monetary receivables 204,455

Long-term monetary receivables 94

Short-term monetary payables 85,938

Long-term monetary payables 1

Notes to the Non-Consolidated Statement of Income Volume of transactions with affiliated companies

(Millions of yen)

Operating transactions

Sales amount 357,570

Purchase amount 98,905

Non-operating transactions 134,245

Notes to the Non-Consolidated Statement of Changes in Equity Type and number of shares of treasury shares as of March 31, 2017

Common shares: 734,923 shares

- 40 -

Tax Effect Accounting 1. Breakdown of deferred tax assets and deferred tax liabilities by major cause

(Millions of yen)

Deferred tax assets:

Investment securities 23,619

Software and other assets 5,977

Provision for bonuses 2,310


Inventories 1,963

Enterprise tax payable 936

Provision for retirement benefits 606

Allowance for doubtful accounts 174

Long-term accounts payable – other 84

Other 1,409

Subtotal of deferred tax assets 39,168

Less valuation allowance (26,042)

Total deferred tax assets 13,126

Deferred tax liabilities:

Valuation difference on available-for-sale securities (16,515)

Prepaid pension cost (3,841)

Reserve for advanced depreciation of non-current assets, etc. (1,374)

Total deferred tax liabilities (21,732)

Net deferred tax assets (liabilities) (8,606)

2. Reconciliation between the normal statutory effective income tax rate and the actual effective tax rate after

the adoption of tax-effect accounting

(%)

Normal statutory effective income tax rate 30.8

(Reconciliation items)

Dividends income and others that are permanently excluded from taxable income (19.4)

Foreign income tax withheld relating to dividends from foreign subsidiaries 4.9

Tax credit for experiment and research expense, etc. (3.3)

Valuation allowance (0.5)

Unrecognized tax effect on foreign income tax credit (0.5)

Entertainment expenses and others that are permanently excluded from taxable loss 0.5

Per capita inhabitant’s tax 0.1

Other (0.1)

Actual effective income taxes rate after the adoption of tax-effect accounting 12.4

3. Revision of the amounts of deferred tax assets and deferred tax liabilities due to the change in corporate income tax

rate

Following the enactment in the Diet of the “Act for Partial Revision of the Act for Partial Revision of the

Consumption Tax Act for the Fundamental Reform of the Taxation System to Achieve a Stable Source of Revenue

for Social Security” and the “Act for Partial Revision of the Act for Partial Revision of the Local Tax Act and

Local Allocation Tax Act for the Fundamental Reform of the Taxation System to Achieve a Stable Source of

Revenue for Social Security,” on November 18, 2016, the statutory effective income tax rate used in the calculation

of deferred tax assets and deferred tax liabilities for the fiscal year under review has been changed from the figures

used for the previous fiscal year.

As a result, deferred tax liabilities (net of deferred tax assets) and income taxes – deferred recorded in the fiscal

year under review were revised. However, the resulting impact is immaterial.

Non-Current Assets Used under Lease Contracts In addition to the non-current assets recorded in the non-consolidated balance sheet, certain assets, including several

sets of computers, are held and used under lease contracts.

- 41 -

Transactions with Related Parties Directors, Audit & Supervisory Board Members, major individual shareholders, etc.

Attribute Name Business line or

occupation

Ownership

percentage of

voting rights

(%)

Description of

transactions

Transaction

amount

(Millions of

yen)

Account title

Year-end

balance

(Millions

of yen)

Director/

Audit &

Supervisory

Board

Member

Chiyono

Terada

External Director of

the Company

President and

Representative

Director of Art

Corporation

0.00 (held)

Commissioned

removal and

merchandise

distribution

business (Notes 1, 2, 3)

488

Accounts

payable – other and accrued

expenses

46

Notes:

1. Refers to so-called arm’s length transactions.

2. The above transactions are determined by taking into account the market price and other factors similar to those for general

transactions.

3. The transaction amount does not include consumption taxes, whereas the year-end balance includes consumption taxes.

Subsidiaries

Attribute Company

name

Ownership

percentage

of voting

rights (%)

Relationship

with the

Company

Description of

transactions

Transaction

amount

(Millions of

yen)

Account title

Year-end

balance

(Millions

of yen)

Subsidiary

Daikin HVAC

Solution

Tokyo Co.,

Ltd.

100%

(directly

holding)

Sale of air

conditioning

equipment

Sale of air

conditioning

equipment (Notes 1, 2)

62,843 Accounts

receivable – trade 5,694

Goodman

Manufacturing

Company, L.P.

100%

(indirectly

holding)

Sale of air

conditioning

equipment

Sale of air

conditioning

equipment (Note 1)

26,679 Accounts


Daikin

Industries

(Thailand)

Limited

100%

(directly

holding)

Receipt of

royalties related

to sale of air

conditioning

equipment

Receipt of

royalties related

to sale of air

conditioning

equipment (Note 1)

14,322 Accounts


Goodman

Global Group,

Inc.

100%

(indirectly

holding)

Loan

Loan (Note 4)

45,421 Short-term loans

receivable 50,485

Loan —

Long-term loans

receivable

from subsidiaries

and associates

(incl. current

portion)

117,799

Interest income (Note 3) 2,411

Other

current assets 782

Daikin

Applied

Americas

Inc.

100%

(indirectly

holding)

Loan

Loan (Note 4) 26,531

Short-term loans

receivable 26,925

Interest income (Note 3) 252

Other

current assets 3

American Air

Filter

Company, Inc.

100%

(indirectly

holding)

Loan

Loan (Note 4)

16,628 Short-term loans

receivable 10,321

Loan 21,096

Long-term loans

receivable

from subsidiaries

and associates

(incl. current

portion)

22,438

Interest income (Note 3)

497 Other

current assets 102

AAF-McQuay

Group, Inc.

100%

(directly

holding)

Capital increase Underwriting of

capital increase 19,951 — —

- 42 -

Notes:

1. The terms applicable to transactions have been determined with reference to the market price in the same way as with the terms

applicable to transactions in general.

2. The transaction amount does not include consumption taxes, whereas the year-end balance includes consumption taxes.

3. The interest rate has been determined in accordance with the market interest rate.

4. Borrowing and loan are related to CMS (Cash Management System), and transaction amount shows the average balance during the

period.

Per Share Information Net assets per share: ¥2,076.81

Earnings per share: ¥426.54

43

Reference Documents for the General Meeting of Shareholders

First Item: Appropriation of Surplus

The Company pays stable dividends to shareholders in comprehensive consideration of the ratio of

dividends to consolidated net assets, consolidated dividend payout ratio, consolidated operating

performance, financial situations, and capital demands.

We propose to pay a year-end dividend for the 114th fiscal year as follows, which is a dividend

increase of ¥5 per share from that of the preceding year, since we posted a higher profit for the fiscal

year under review.

This dividend would result in an annual dividend—including the interim dividend—of ¥130 per

share, an increase of ¥10.

Year-end dividends

(1) Amount of dividend assets to be allocated to shareholders

Cash of ¥70 per share of common stock of the Company

Total: ¥20,466,533,500

(2) Effective date of dividends from surplus

June 30, 2017

44

Second Item: Election of Two (2) Audit & Supervisory Board Members

The terms of office for Audit & Supervisory Board Members Ryu Yano and Kenji Fukunaga will

expire as of the conclusion of this general meeting of shareholders. Therefore, we propose the

election of two (2) Audit & Supervisory Board Members.

This proposal has been approved by the Audit & Supervisory Board.

The candidates for Audit & Supervisory Board Members are as follows.

Candidate

number

Name

(Date of birth)

Brief personal history and position held

[Significant positions concurrently held]

Number

of the

Company

shares

owned

1 Ryu Yano

(April 21, 1940)

Reappointment

Candidate for Audit

& Supervisory

Board Member

(external)

Candidate for

Independent

Director

April 1963 Entered Sumitomo Forestry Co., Ltd.

December 1988 Director of the above company

June 1992 Managing Director of the above

company

June 1995 Representative Director of the above

company (Current position)

Senior Managing Director of the

above company

April 1999 Director, President of the above

company

June 2002 President and Executive Officer of

the above company

April 2010 Director, Chairman of the Board of

the above company (Current

position)

June 2013 Audit & Supervisory Board Member

of the Company (Current position)


Chairman of the Board and Representative Director of

Sumitomo Forestry Co., Ltd.

0 shares

Reasons for Nominating Candidate for Audit & Supervisory Board Member (external):

Mr. Ryu Yano has extensive experience and deep insight as a corporate manager, including a wealth of

overseas business experience, serving as Representative Director of Sumitomo Forestry Co., Ltd.

Drawing on such proven track record, Mr. Yano has appropriately performed his duties as Audit &

Supervisory Board Member (external) of the Company since 2013. For these reasons, we have

appointed Mr. Yano to continue as Audit & Supervisory Board Member (external), believing that he will

continue to contribute to the monitoring of overall management and realizing even more appropriate

audits.

Attendance for Meetings of the Board of Directors and Audit & Supervisory Board:

Attended 12 out of 16 meetings of the Board of Directors (75.0%), and 13 out of 15 meetings of the

Audit & Supervisory Board (86.6%).

Notes:

1. Mr. Ryu Yano does not hold any special interests in the Company.

2. Mr. Yano is a candidate for Audit & Supervisory Board Member (external). The Company will

continue to report him to the Tokyo Stock Exchange, Inc., as Independent Director if he is

45

selected as Audit & Supervisory Board Member (external).

3. As of the conclusion of this general meeting of shareholders, Mr. Yano will have been an Audit &

Supervisory Board Member (external) for four years.

4. The Company has concluded a limitation of liability agreement with Mr. Yano, in accordance with

Article 427, Paragraph 1, of the Companies Act and the Company’s Articles of Incorporation.

Under this contract, liabilities for compensation are the lowest amount of liability stipulated by

Article 425, Paragraph 1, of the Companies Act. In the event that his reelection is approved, the

Company intends to continue the said agreement with him.

Candidate

number

Name

(Date of birth)



Number

of the

Company

shares

owned

2 Kenji Fukunaga

(April 14, 1948)

Reappointment

April 1971 Entered the Company

May 1992 Department Manager of Planning

Department of Defense Systems

Division of the Company

January 1995 Deputy General Manager of Defense

Systems Division of the Company

June 1998 General Manager of Defense

Systems Division of the Company

July 2000 Honorary Officer of the Company

June 2002 Associate Officer of the Company

June 2004 Honorary Officer of the Company

May 2009 Defense Systems Division of the

Company [defense-related liaison]

June 2013 Audit & Supervisory Board Member

of the Company (Current position)

7,600

shares

Reasons for Nominating Candidate for Audit & Supervisory Board Member:

Mr. Kenji Fukunaga has extensive experience and insight regarding the Company’s management mainly

in the defense systems-related product business. Drawing on such proven track record, Mr. Fukunaga

has appropriately performed his duties as Audit & Supervisory Board Member since 2013. For these

reasons, we have appointed Mr. Fukunaga to continue as Audit & Supervisory Board Member, judging

that he is able to adequately fulfill the duties of Audit & Supervisory Board Member.

Note:

Mr. Kenji Fukunaga does not hold any special interests in the Company.

46

Third Item: Election of One (1) Substitute Audit & Supervisory Board Member (external)

Based on the provisions of Article 329, Paragraph 3, of the Companies Act, we propose the election

of one (1) Substitute Audit & Supervisory Board Member to prepare for the possibility that the

number of Audit & Supervisory Board Members (external) as defined in Article 335, Paragraph 3, of

the Companies Act may become insufficient. This proposal has been approved by the Audit &

Supervisory Board.

The candidate for Substitute Audit & Supervisory Board Member (external) is as follows.

Name

(Date of birth)



Number of

the Company

shares owned

Ichiro Ono

(April 3, 1949)

April 1978 Registered as a lawyer

(Current position)

April 1990 Managing Partner of Higobashi Law Office

(Current position)

April 2003 Vice Chairman of the Osaka Bar Association

April 2009 Member, Mediation Committee, Osaka Family

Court

July 2010 Chairman, Information Disclosure Review

Board, Osaka City


Managing Partner of Higobashi Law Office

3,000 shares

Reasons for Nominating Candidate for Substitute Audit & Supervisory Board Member (external):

Mr. Ichiro Ono has extensive experience and deep insight as a lawyer, including being involved in

handling corporate legal affairs for many years. We have appointed Mr. Ono as Substitute Audit &

Supervisory Board Member (external) in order to benefit from his experience and insight in the

monitoring of overall management and to realize even more appropriate audits.

Although Mr. Ono does not have experience of direct involvement in corporate management, we have

judged him able to adequately fulfill the duties of Audit & Supervisory Board Member (external) for the

reasons stated above.

Notes:

1. Mr. Ichiro Ono does not hold any special interests in the Company.

2. Mr. Ono is a candidate for Substitute Audit & Supervisory Board Member (external). The

Company will report him to the Tokyo Stock Exchange, Inc., as Independent Director if he is

selected as Audit & Supervisory Board Member (external).

3. If Mr. Ono assumes the position of Audit & Supervisory Board Member, the Company intends to

conclude a limitation of liability agreement with him, in accordance with Article 427, Paragraph 1,

of the Companies Act and the Company’s Articles of Incorporation. Under this contract, liabilities

for compensation are the lowest amount of liability stipulated by Article 425, Paragraph 1, of the

Companies Act.

The above represents a translation, for reference and convenience only, of the original notice issued

in Japanese. We did our utmost to ensure accuracy in our translation and believe it to be of the

highest standard. However, due to differences of accounting, legal and other systems, as well as of

language, this English version might contain inaccuracies and therefore might be inconsistent with

the original intent imported from the Japanese. In the event of any discrepancies between the

Japanese and English versions, the former shall prevail as the official version.

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